For the first few years of a small or medium-sized business’ life, there is a lot of trial and error. As new entrepreneurs begin investing, budgeting and managing their finances, they find that even the best-laid plans have a few bumps in the road, and when it comes to strategic planning, it can sometimes be hard to predict the future.
Still, strategic planning is essential. According to the Australian Bureau of Statistics, an average of 44 small businesses close their doors every day. Therefore, it is imperative that small and medium-sized businesses plan, plan and plan some more.
But what happens when it turns out your strategic plans were not so strategic after all? Could you be making one or more of the following mistakes? Here are the top strategic planning mistakes that small and medium-sized businesses make and how to avoid them.
Limited cash reserve
Every business owner knows that it takes a lot to get a business off the ground.
Naturally, business owners know the means of production or delivering a service cost a lot of money, but many times, they fail to estimate just how much money it will cost to get a business off the ground. While they plan for the setup of their business, they do not often realise that for the first few quarters of their business’ life, they will probably be in the red. They think they will begin making a profit and will be able to start repaying loans and reinvesting.
To help plan, there are two key factors to be aware of:
- What your initial Cash Burn (or runway) is. This will tell you how much money you need upfront to last you until cash from sales start coming into the business. If you don’t know how much cash you’ll need you can almost guarantee you will run out of it quicker than expected.
- How much Working Capital you need to fund your operating costs. Working capital is made up of the extra cash made by your profits, over time this builds a buffer in the business to make sure you can take care of operating costs as well as anyone off hits that may come around.
Credit card dependence
Credit cards give business owners the illusion of infinite cash and an infinite amount of time to pay them off. Not to mention awesome travel points! So long as business owners can make the minimum payment, they can continue charging business expenses and digging themselves further into expensive debt.
The biggest problem with these cards is the interest. With higher interest rates and low minimum payments, credit cards end up charging people far more than what they actually spent, and with the build up of interest, it can take business owners years to pay off the bills.
Business owners who have not strategically planned their finances often turn to credit cards at an early stage of a business venture, but there is a way around it.
By setting up working capital loans (overdrafts, trade finance or debtor finance), capital income, small and medium-sized business owners can ensure they will have funds coming in, which makes it easier to stay away from high interest rate credit cards
Combining business and personal finances
Starting a business is a labour of love. When many business owners first start their business, they devote everything they have to it. They pour their life savings into the business and max out all personal credit cards. Some even consider taking out second mortgages on their houses.
While it may seem that you must go ‘all in’ to get a business of the ground, this method only endangers your family’s personal financial state. Should things really get bad, you might lose more than just your business, such as your home or your retirement savings.
Though it may seem crazy not to give your all to your business, it is important that you keep your personal and business finances completely separate from one another. Juggling both types of finances leaves more room for error. You might try to pay off one personal bill with finances from your business, but then how do you pay business expenses? What if you forget a business expense and spend the money on something personal.
To avoid mixing these two, keep your accounts separate. Keeping things separate will help you better see whether or not your company is actually profiting or in the red. This will work, so long as you are not guilty of…
In a perfect world, balancing a business’ books would be easy. Now that so many banks are online, businesses can easily keep track of the money going in and out of their accounts and how much needs to be saved for monthly expenses, like leases and salaries. However, if you never keep a receipt or file it properly, then you will never see the whole, clear picture of your company.
All businesses need to have some method of tracking their incomes and outcomes. If you are always aware of how much money you have, how much will be coming in and how much will be going out, you will be better able to strategically plan for a rainy day.
Make time each day to look at your expenses and tally up incomes and expenses, no matter how tired you are. Keep receipts in a safe place, and even if you know your business is in the green, always balance your books at the end of the month. So long as your records are tidy and succinct, you will have no trouble strategically planning your company’s next move.
Of course, you cannot plan every sort of catastrophe that may befall your business, but you can make sure that your small or medium-sized business is prepared for the worst. By doing so, you will be able to cushion any big falls and turn even the hardest fall into the softest landing.