Five common mistakes small businesses make… and how to avoid them

SMEs (small and medium entities) account for more than half of all wealth generated by the UK private sector and over 60% of employment. They are therefore the backbone of wealth generation in this country. But they (and especially the smaller businesses in the SME space) do have a number of issues that I see on a regular basis, irrespective of the trade or industry these businesses operate in.

It’s worth sharing some of these common mistakes to avoid you having to make them.

1. At the top of the list is underestimating the importance of cash flow

The much-used expression ‘cash is king’ was coined for good reason and cash flow continues to be an absolute fundamental for any business. I have seen innovative, well regarded and profitable businesses struggle or even fail completely because there was a lack of cash available to settle the day-to-day debts of the business as they fell due.

Why could this happen when the business has strong revenues and is profitable?  Well, the business may have made a lot of sales which translated to a great top line and a healthy profit figure. However, the business might not have been paid for all these sales so the debtors figure is large. A creditor comes along, demands settlement and the company does not have the cashflow to pay.

2. Underestimating the importance of time

Most business owners will understand revenues and costs but underestimate the time costs of running the business.  There is a tendency to ‘wear many hats’ and to metaphorically fight fires rather than concentrate on the aspects that are important. At best, this means you probably won’t be maximising the potential of your business. At worst, you could be storing up trouble by failing to notice or address issues which threaten to undermine your business.

3. Chasing turnover

Many business owners are far too preoccupied with achieving greater turnover figures at the expense of bottom line profit.  This could cause a cash flow issue, as mentioned.  Another well used phrase is ‘turnover is vanity and profit is sanity’ which illustrates that business owners should be more concerned with their profitability rather than the headline turnover figure.

4. Not having a business plan

Another well used phrase is ‘fail to plan, prepare to fail’; if a business does not have a plan then how is it supposed to grow and thrive?  The act of committing a plan to paper or electronic copy ensures it is more likely to happen.  It ensures that the business remains focused on what’s important and avoids distractions.

5. Not having an exit plan

If a business owner does not have an exit plan then all they have is a ‘lifestyle’ business as the business will stop when they do.

So, there are my top five mistakes. Now let’s take a look at how you might avoid making them.

Cash flow

• Take control of your invoicing and debtors’ list. Make sure you get bills out on time… and don’t be afraid to (politely) enforce your payment terms. Should you see a problem emerging, don’t bury your head; speak to the company concerned to understand the issue and to agree how and when this is to be addressed.
• Talk to your bank or lender about sufficient overdraft or short term facilities to be able to meet debts as they fall due, if there is a temporary blip of sales revenue. An often used measure is one month’s expenses and payments without any income.
• Produce a cash flow forecast to identify ‘rocks in the road ahead’; this would identify pinch points and ensure that the business leaves enough cash in reserve to meet these commitments.

Time

• Every business has a trade off between what you do yourself (and save money) and what you outsource (and spend money). Determine where you are on this line, analyse what you like doing and what you are good at.
• Upskill colleagues to support you and empower them to run parts of your business.
• Don’t be afraid to get experienced external support where you need it.

Turnover v Profit

• Analyse within your business the service lines that are the most profitable.
• Ensure the business uses proper costing processes in its quotes so that less profitable jobs can be determined

No business plan

• Work with your accountant, business coach or advisors to help you craft a plan.
• Stress test the plan to try and cover as many ‘what ifs’ as possible.
• Revisit it every day or week – don’t leave it in a drawer gathering dust!

No exit plan

• Talk to your accountant or financial advisor about the options regarding your ‘end game’ be it a disposal, a management buy-out, succession to the children etc.
• Advice at this stage can help shape the business for a disposal and ensure a better price is achieved.

Conclusion

In today’s challenging business environment, and facing these issues and many others, it is vital for business owners to talk regularly with their accountant, bank relationship manager and other advisors to help them when needed.

Don’t just use these advisors for compliance – tap into their deep knowledge of SMEs and the problems and solutions they have found over the years.