Writing exclusively for Business Advice, specialist and author of new book The Profitable Professional, Kelly Clifford, reveals seven common profit draining mistakes startup founds frequently make, and how they can be avoided this year.
If you are looking to grow your business and improve its profitability this year, your first step should be to identify where your business is losing profit, and it could be in the places you least expect.
Mistake One – Failing to factor in fixed costs when pricing
When deciding on pricing, many small business owners make the mistake of only focusing on the gross profit margin and tend to forget about allocating something for their overheads or fixed costs. They then wonder why they don’t make any profit.
Mistake Two – Thinking that as long as there is money in the bank, they are making money
Just because money is flowing into the business bank account doesn’t necessarily mean that a profit is being made on it.
Many businesses fail to look at all the factors when agreeing to do work at a given price level. Usually the price is set by market forces but many business owners fail to even do a basic analysis to work out whether they can deliver the service at a cost, less than the revenue received, whilst generating a sufficient profit margin above all costs – both fixed and variable.
Mistake Three – Thinking it is job done once a client has been invoiced
It is not the end of the story when an invoice is sent to a client for payment. A business must ensure that the payment is collected in accordance with its payment terms.
There is no point in invoicing a client if payment is not collected for it. Remember, a profit isn’t actually earned until the amount for the invoice is physically received as cash. A small business owner must be proactive in the collection of its invoices.
Mistake Four – Not paying close enough attention to cash flow
In business, cash is king. In some ways, managing cash flow is the most important aspect of running a business. If at any time a business fails to pay an obligation when it is due because of the lack of cash, the business is technically insolvent.
Insolvency is the primary reason businesses go bankrupt. Obviously, the prospect of such a dire consequence should compel businesses to manage their cash with care. Moreover, efficient cash management means more than just preventing bankruptcy. It improves profitability and reduces the risk to which the business is exposed.
Businesses suffering from cash flow problems have no margin of safety in case of unanticipated expenses. They may also experience trouble in finding the funds for innovation or expansion. Finally, poor cash flow makes it difficult to hire and retain good employees.
Mistake Five – Not producing and reviewing financial reports regularly
Many business owners I talk to have an ostrich mentality when it comes to the numbers side of their business. They just hope that everything will be fine.
When I ask these same small business owners when they last spoke to their accountant, or where the last set of financial statements are, many reply that they only speak to their accountant at year-end time or ask, “What set of financial statements?’ or say they’re “In the bin”.
These situations are really alarming because apart from the legal obligations when it comes to record keeping, the business could be at serious risk with this avoidance mentality.
Numbers aren’t to be feared. If working with and understanding numbers isn’t a strong skill set of a business owner then they should seek help immediately.
Mistake six – Not having a budget
A budget is a comprehensive plan that estimates the likely expenditure and income for a business over a specific period, typically on twelve-month cycles. It is a financial road map for a business that is derived from an underlying business plan.
Budgeting describes the overall process of preparing and using a budget. A budget is a hugely valuable tool for planning and controlling finances. The process itself helps a business to determine the most efficient and effective strategies for making money and expanding its asset base.
Mistake seven – Spending money unnecessarily
I guarantee that almost every business is wasting money on something unnecessarily, whether it is through paying more than they should be, buying the wrong type of input or buying things that the business doesn’t actually need.
Take business utilities for instance. Most businesses simply accept what utility companies offer them in terms of tariff. They don’t know if it is even the right tariff and usually get locked into a higher tariff than is needed. I would advocate using one of the free impartial utility management services to manage this side of a business. I would advocate the same approach when it comes to office stationery and procurement.
Producing regular financial statements and having a handle on the numbers is key to effective cost management and avoiding profit draining mistakes. Unless a business knows exactly what it is spending its money on, it is difficult to know where and how improvements can be made.
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