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Microbusinesses are among the most accessible forms of entrepreneurship available. You require relatively little startup capital and can function with a small staff or even alone. Yet, at the same time, a lot of them do not last particularly long. One-third of Australian small businesses have reported being in poor financial health, which impacts longevity. So what can you do about it asks Indiana Lee.
If you get a good understanding of the financial errors microbusiness owners tend to make, you can empower yourself to avoid them. This takes research, preparation, and commitment to change. So, let’s get you started by exploring some of the common financial mistakes you need to be aware of.
Not taking finances seriously
Having a microbusiness doesn’t mean you need to take your finances any less seriously than a large corporation. Casual or bad bookkeeping practices can result in significant consequences for your business. Firstly, a lack of accurate records makes it more difficult to make responsible decisions, which may even result in sudden financial loss because you might inadvertently spend more than your company can stand. Inaccurate financial documents may also see you fall foul of compliance laws due to mistakes made when submitting your tax reports. Therefore, it is vital to take finances seriously.
Alongside record keeping, one of the elements that enables you to be more responsible is to learn some basic accounting and bookkeeping skills if you haven’t already done so. This empowers you to create more accurate and relevant financial documents for your business and make decisions based on them accordingly.
Your focus should include how to keep cash flow records, recording all movement in and out of the business on a daily basis. Gaining some financial analytical skills that help you to forecast cash flow is also useful. You can pursue a formal course or there are plenty of online videos and guides available if you prefer the self-driven learning approach.
Another way to take your finances seriously is to keep them separate from your personal finances. A lot of microbusiness owners keep their money in one account because they’re dealing with relatively small amounts of income. Yet, getting a separate business bank account ensures there’s no confusion between personal and professional income and expenses. This boosts clarity for tax reporting, applying for funding, and making business plans.
Failing to keep organised
Another financial error that microbusiness owners tend to make is not maintaining good financial organisation. While your cash flow may be on a small scale now, you may be able to keep a certain amount of information in your head or deal with making records later. However, things in business can change really quickly. If you’re caught off-guard by sudden growth or challenges, a disorganized financial ledger can lead to disaster.
Wherever possible, minimize the amount of physical paperwork your accounts are based on. As long as you’re aware of the risks of digitisation, you’ll benefit greatly from going digital. Yes, some entrepreneurs find it easier to ideate and plan by hand. However, bits of handwritten budget planning here and invoices there can become easily lost or damaged. There are a lot of free tools on the market that allow you to create and manage electronic invoices. Not to mention that many of your online purchases will result in electronic receipts to your email. If you do receive physical paperwork, you can take photos of these and upload them to your computer.
While this is a way to ensure your paperwork doesn’t get misplaced, you still need to keep an organised digital filing system. This begins with creating separate file folders for different types of documents, perhaps with subfolders for each quarter or year. You should also decide on a consistent naming protocol for each file. For instance, invoices can be named by each client title followed by the month of issue. This basic protocol enables you to easily search for and find documents whenever you need to reference them, as well as for simplified end of financial year (EOFY) tax reporting processes.
Taking an entirely manual approach
Running a microbusiness doesn’t mean that you have to do all your financial planning, record-keeping, and transactions manually. That takes up valuable time you could be dedicating to other areas of your business. Manual processes can also expose you to greater risks of human error in your finances. By leveraging technology to automate at least some of your financial tasks, you can gain from fewer burdens and stress.
A good place to start with this is with cloud-based platforms. Cloud accounting tools are becoming a more prevalent and affordable part of the business landscape. Stored and operated away from your premises, these tend to be more cost-effective as you’re not hosting the software on your own servers. You can also access your records wherever you can get an internet connection, which is great if you travel frequently. Importantly, cloud accounting platforms often come with a range of features. Alongside enhanced security, a lot of cloud tools offer a certain amount of automation.
This may include data entry into cash flow records whenever you upload expenses or invoices on the platform. Some systems will send reminders to clients when invoices haven’t been paid within a certain time frame. Others can automatically generate financial reports so you can get an accurate overview of your resources without having to make manual calculations.
Another relatively simple yet impactful aspect to automate is paying repeated bills. Many current banking apps give businesses the option to repeat specific periodic payments from your account. This could include utilities, supplier payments, and web hosting costs. This might seem a small thing, but in the long run, you’re gaining valuable time you can dedicate elsewhere.
There are a few key areas in which microbusiness owners tend to make mistakes. By getting to know these, you can adopt measures that help you avoid them and influence your success. Remember, too, that challenges can be individual. Be honest with yourself about what your personal financial blindspots are, so that you can put contingencies in place to make your business more robust.
Source: Flying Solo August 2024
This article by Indiana Lee is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others https://www.flyingsolo.com.au/join.
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