Seven common financial mistakes which cause businesses to fail

By Jake Martin

2 min read

©iStockphoto.com/JoKMedia

Did you know that over 80% of all businesses in the UK ultimately FAIL? In many of these cases, it is not because the business owners aren’t passionate about what they do or good at the doing part of their business. The missing ingredient is “profit numeracy” – they are not on top of their numbers and they don’t truly understand profit.

So let’s look at the seven common mistakes that many companies make when it comes to managing the financial side of their business, which in many cases may result in that business failing.

Common Mistake 1 – Failing to factor in fixed costs when pricing

When deciding on pricing, many 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.

Common Mistake 2 – Thinking as long as money is flowing into the business bank account you 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.

Common Mistake 3 – 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.

Common Mistake 4 – Not paying close enough attention to cashflow

In business, cash is king! In some ways, managing cashflow 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 a lack of cash, the business is technically insolvent.

Efficient cash management means more than just preventing bankruptcy. It improves profitability and reduces the risk to which the business is exposed.

Common Mistake 5 – 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. I find these situations really alarming because apart from the legal obligations when it comes to record-keeping, the business could be at serious risk because of this avoidance mentality.

Common Mistake 6 – 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 12-month cycles.

To be successful, budgets should be SMART – which means specific, measurable, achievable, realistic and timed.

Common Mistake 7 – Wasting 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.

Producing regular financial statements and having a handle on the numbers is key to effective cost management.

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To be entered into a draw to win a free copy of the book, tell us your number one financial  tip for other small businesses –  just leave a comment below or on the Intuit UK Facebook wall, or tweet us.  Your tips will be published on this blog too, with a link back to your site. The competition closes on 31st December 2012.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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