A business can't survive on passion alone - it takes hard work, patience, business-nouse and, sometimes, knowing who and when to call for help. But the rewards for those who succeed are great.
According to the Australian Bureau of Statistics, more than 60 percent of small businesses shut up shop within their first three years. This high rate of failure isn't due to a lack of passion. In most cases, it's simply because they spent more money than they earned.
It sounds simple, but this is where many small businesses slip up - they rely on their passion and underestimate the importance of the financial stuff.
Here are our top 6 financial tips for small business owners:
Don't mix your finances
Don't be tempted to treat your business like your personal piggybank - borrowing money from your business to buy a new car or top up your personal credit card is the start of a slippery slope that can send you spiraling into a financial black hole.
Start modestly
When you are just starting out, don't get sucked into unnecessary gadgets, business trips and other expenses. Now is not the time to show off. Instead, think of spending in terms of investment. For each new purchase, ask 'what is the potential return on this investment?' This will give you focus and help channel your money into the things that will support your business to grow and succeed in the long term.
Increased sales do not always mean increased profits
Cashflow is the lifeblood of any business. It's important to understand the dynamics of your business's cashflow so you can ensure your liquidity is sufficient to meet your current and anticipated commitments.
It is also important to have an understanding of the relationship between your top line and bottom line. Top line growth indicates an increase in gross sales only, whereas bottom line growth indicates an increase in income after all expenses have been deducted - in other words, net profit.
If you are experiencing a growth in sales, make sure you still have the cashflow to pay the bills. If not, check in with your accountant to really drill down into the numbers.
Maintain your focus on the financials
Unless you have a love of paperwork, bookkeeping often ends up last on the priority list. It is sacrificed in favour of 'more pressing' issues, like bringing in customers and taking care of staffing issues.
But here's a warning: Take your eye off the books for just a moment and they will rewrite themselves - and the happy ending you planned for will be the stuff of fairytales.
Bookkeeping is like doing the dishes, the more you put it off, the more the pile grows. If finances aren't your thing, there are lots of software solutions that can do the work for you.
If the hours you are working are not sustainable, you're probably not profitable
Small business owners often underestimate the value of their own time. We're not saying don't put in the hours, just be aware of the real time and effort you are investing personally as it could affect your company's bottom line.
Firstly, working 80+ hours a week is probably not sustainable - when you stumble, your business will suffer. Secondly, uncompensated work affects your businesses' salability. Only by accounting for all your costs, including true labour costs, will you be able to determine how profitable you are.
Look for capital before you need it
If growth is part of your business plan, start looking for extra capital before you need it. To get a loan or attract investors, your need a healthy cashflow and financials, a good credit rating and track record, and a solid business plan.
There's no point looking for cash if sales are on the down and the market is contracting. Think ahead, plan ahead and act sooner rather than later.
Or check out our Australian business for sale opportunities.
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