Financial traps that could affect your SME
Making mistakes happens to everyone who gets into business. Some SME mistakes, however, can hit you and your business really hard. While unexpected circumstances can hardly be avoided, financial mistakes are often the result of misinformation or poor planning. As you take care of your business, keep an eye out for these pitfalls and avoid them.
Not writing a business plan is a bad idea
Writing a business plan can be time and resource-consuming, and it may seem unnecessary if you are not looking for investors or trying to get a business loan from a bank. However, having all the information about your business gathered and organised may become very useful further down the road.
A business plan will help you establish your short and long term goals, and help you focus on how to achieve them in practice. Entrepreneur points out that a business plan will basically guide every decision you make regarding your company’s development, and be a fundamental aid if you ever lose track.
Many banks including Barclays, as well as the Government, offer guides on how to write a business plan that can help you put one together for your SME.
Not planning for unexpected expenses
With a business plan in place, you will know how much money you need to run your business, but unexpected events or expenses might disrupt your financial plan. These financial losses can add up really quickly and you could find yourself in debt.
Research from British Gas also found that a third of SMEs do not plan close of financial year and risk going into debt.
We have spoken often about how monitoring your finances is absolutely necessary, and it is especially important now that SME overdrafts have been drastically reduced. We recommend cloud-based accounting software that both you and your accountant can access and update at any point in time.
Not getting everything in writing
Finance website The Simple Dollar makes a big point of getting everything in writing when you run a small business: “misunderstandings, confusions, and disagreements can cost your business time and money”. They strongly advise against verbal contracts and point out that not having written agreements may cost your business millions down the line.
They suggest to put on paper anything concerning employment contracts, equity agreements, customer, supplier contracts, real estate contracts. Pay particular attention to the terms and conditions of contracts, and ask questions if you don’t understand.
Commingling of funds
Mixing your personal funds with your business funds – in a word, commingling – can be a huge problem, especially for SMEs and single person businesses. You should never use your own money for business-related matters and vice versa.
Keeping separate bank accounts can help you avoid commingling of funds. Doing so will help you with your financial records and tax reporting. If you are a sole trader, you can read our two-part guide on budgeting for freelancers, which talks about both business and personal finance management.
Underestimating the need for marketing
You may be selling an amazing product or service, but you will not go anywhere if nobody knows about you. A massive and very expensive marketing campaign might not be necessary, but you will need to do some simple marketing moves to get your business off the ground.
The Guardian suggests that one of the best marketing tools for SMEs is to get to know some local suppliers so you can make sure you are spending money on reputable companies.
They also advise becoming an expert in social media, which you can do by yourself and is “perfect for establishing yourself as an expert in your field”. Online marketing is cheaper than traditional marketing, the Telegraph points out. Include budget for a website and some basic marketing in your business plan straight from the beginning and do not miss out on the opportunities that being online can give your business.
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