Starting out is often the hardest part in business with cash flow the major cause of angst among business owners. Here are 8 cash flow traps businesses face and how to manage them.
1. Not knowing if the business is viable
Not knowing whether or not you have a viable business idea is one of the biggest traps for start-ups. Two key mistakes are not getting feedback and not starting small. These days, it is so easy to start up pretty much overnight. You can set up a pay-by-the-month website, establish an online store, test the market and see what the market says before you spend thousands of dollars on an expensive website and branding. It pays to do a bit of market research and testing.
2. Wasting money starting up
A closely-related trap is wasting money when setting up. As a business owner it is important to understand what you should be paying for and what you can get free by knowing where to go.
3. The price is wrong
Be careful of your price point. At the end of the day the market will dictate the price. If you try and set your price too low you can have a problem. There is usually a good reason why other people charge more. Similarly, pricing too high can also ruin a business.
Be aware of the cost of your overheads. Break it down to know exactly how much of X you need to sell or generate Y amount of income to cover your costs. Anything above that is actual profit.
5. Raising invoices doesn't equal a sale
Change your definition of a "sale". It is a sale only when the money has been banked. Until then, what you have done is provided a pro bono service, even if you have raised an invoice for it. Don't make the mistake of continuing to work for clients when they owe money.
6. Don't spend your taxes
Lose the "I need the money now so I'll just use it and find it when I have to" attitude. Generally you don't find it and then you don't lodge your business activity statement (BAS) return because you can't afford to pay it. This has a roll on effect, one missed payment becomes six and soon the ATO becomes your (unwilling) lender of last resort. A healthy bank balance isn't an indicator of how well business is going. Don't forget this money may be allocated to your upcoming payments like BAS and contractors. Only spend when your cash flow forecasting allows it.
7. Don't neglect paperwork
Failing to account for things like tax suggests people are going into business before working out their financial systems. Business newbies should consider setting up a separate tax account and transfer money into it to quarantine it.
8. Don't be afraid to ask for help
Make sure you get the accounting and bookkeeping help you really need. But that in itself can be problematic. There are plenty of good accountants and bookkeepers out there, but can they speak your language and can you understand what they say?
- Tax accountants can deliver good advice on tax and structuring many have never run a business. They can tell you that you are in trouble but may not be able to give you advice on how to get out of it.
- Bookkeepers they might be excellent at keeping your records up-to-date but you have to find somebody who will work well with you, even if that means fishing your receipts out of shoe boxes.
Networking is a great way to learn from others. It is comforting to know there are others out there in the same position as you and some may be able to recommend other professionals. At the end of the day we all go through it, we all continue to go through it and there is strength in helping each other.
This information is current as at 28/10/2014.
BT Financial Group - A Division of Westpac Banking Corporation. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this, before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.