2020 will undoubtedly go down as the year that challenged everything you knew about running a small business.
While it may be exciting and fulfilling to run your own small business, financial risks and challenges are part and parcel of the game. Any company can fail by making financial errors when it comes to saving. That reality can hit incredibly hard during a pandemic.
If this year has proved anything at all, it’s that saving money can save your business. While financial pitfalls are usually predictable, there are times when you’ll encounter them unexpectedly. Such pitfalls can be ruthless and happen swiftly, leaving you no time to take pre-emptive action.
Ensuring a disciplined approach to your savings protocol from the outset can be the make-or-break factor in keeping your small business afloat. On account of October 31 having been celebrated as ‘World Savings Day’, let’s consider four common mistakes that small businesses and startups make in their savings processes, and understand how you can avoid them.
Mistake #1: Not having cash in reserve
Many entrepreneurs don’t realise the importance of ensuring a cash reserve. Or, they put off starting one until they feel they can afford to do so. A cash reserve is essential for your business. It helps you pay employees and suppliers during tough times and acts as a buffer if clients pay slowly. Most importantly, it can get your business through a downturn. Remember, you need as much financial cushioning as possible.
Savings tip: Even startups should create a cash reserve immediately. Figuring out a number for your cash cushion depends on what you can achieve and are comfortable with.
Here’s a quick calculation: First, add up your average monthly expenses. Next, decide how many months’ worth of expenses you want in reserve: some experts advice three months, others six. Once you’ve decided on your numbers, start transferring the money into a separate bank account. Keep building until you reach your target amount and remember not to touch it unless you absolutely need to.
There is a growth cost to this – the money you save cannot be used to bring in new clients or fund your business. However, it will ensure safety during challenging times.
Mistake #2: A lack of recordkeeping, forecasting, and budgeting
Yet another flaw small business owners are guilty of is that they take a casual approach to accounting, keeping their actual invoices and receipts in a dedicated drawer and monitoring their finances on a spreadsheet or through their bank statements. This informal approach makes it difficult to track your financial performance and leaves you unprepared for developments that threaten to derail your business.
Without accurate, real-time accounting information, you cannot form a clear picture of your cash flow position, and thereby, put a sound savings plan in place.
Savings tip: Invest in a modern, cloud-based accounting solution that enables you to record every transaction in your business accurately. It will give you the financial insights you need to manage cash flow (ensuring that you have more money coming into your business than going out). Armed with the right financial data, you will have an accurate idea of how much you can put into your reserve account every month.
Mistake #3: Underestimating costs
Office space costs money – rent, electricity, phone and internet charges, refreshments, stationery, insurance, and maintenance are just some of the overheads you will encounter. All of this burns through profits and will hinder your ability to save.
Savings tip: The introduction of remote working this year has saved businesses a lot of money. Try and work remotely for as long as you can. If you’re concerned about team morale and communication, factor in a daily video catch-up call. Or rent a shared office space for a few hours a week so that you can get together face to face.
Mistake #4: Making financial commitments to things you don’t need
Every business pays for little things that can add up to significant savings. Some of these include leaving lights on, keeping machinery running when not in use, printing documents you don’t need. These practices eat into your profits, making it harder for you to put cash into reserve every month. The good news is they’re easy to change.
Savings tip: Go green. By switching off lights at night, putting your printer into sleep mode (or going paperless), and turning off all computers, you’ll reduce your electricity bill. Focus on the essentials rather than the nice-to-haves. For example, you need reliable Wi-Fi, but do you need an expensive coffee machine that requires a weekly refill? Remember, the aim is to reduce costs and cut overheads, without sacrificing sales.
All small business owners make financial mistakes, which impact their ability to save. The key to smart saving is to calculate the value in all the tools you use and to cut or replace those that aren’t giving you a good return on investment. Planning your budget, tracking your income and expenses, and consulting with an accountant can help you develop a sound savings plan, and keep your business on a steady footing when the road ahead gets bumpy.