Business owners can cost themselves a lot of money by failing to avoid rookie business mistakes. Here are some traps new players may fall into.
ANZ Senior Financial Adviser Kelly King says business owners, especially those new to self-employment, often fail to plan. They may not realise they are thereby planning to fail – or, at least, planning to be far less financially successful than they could be. Below, Kelly details some of the pitfalls smart operators take care to steer clear of.
Not creating a business plan
“You’d think nobody would launch a business nowadays without creating a comprehensive business plan,” King says. “It’s the one piece of business advice that everyone gives business owners and it’s impossible to get a business loan if you don’t have one.” Nonetheless, King estimates around half of all small business owners haven’t created a business plan and many more have an inadequate one. “You can’t afford to be vague when you’re running a business,” King explains. “You need to know what your expenses will be. You need to have a realistic idea of how much money your business is likely to generate. And you definitely need a clear understanding of what kind of people are going to want to buy what you’re selling and why they will want to buy it from you rather than your competitors.”
King concedes that not having a business plan doesn’t always end in disaster but argues it almost invariably results in suboptimal profits.
“The classic example is a tradesman, such as a plumber, who goes out on their own,” she says. “Tradesmen are almost always in demand and the plumber isn’t likely to go broke. But, if he doesn’t do a business plan, he may not realise exactly how many expenses he’s incurring and what hourly rate he needs to charge to make a decent income. He may not realise that he’ll make more money if he markets himself as, say, a gas fittings specialist, rather than a generalist plumber. He may only be vaguely aware that the market is flooded in one part of the state but not another. In short, he won’t have a road map to refer to while he’s attempting to grow his business and increase his profit margin.”
Failing to budget
Unfortunately, the type of businesspeople who are blasé about drawing up business plans also tend to be casual about budgets.
“As well as having a realistic idea of how much money is coming through the door in any given week, month and financial year, you need to know how much is going out,” King says. “Rent, insurance premiums, wages, income tax, GST, IT expenses, energy bills, business loan repayments, marketing costs, bookkeeper fees, work vehicle repayments, membership dues for industry associations etc. – you need to know down to the cent what you need to pay and when you need to pay it.”
King warns that while it’s possible for a business to survive indefinitely if more money is coming in than going out, sooner or later there is likely to be a cash-flow crisis. For instance, many new business owners either forget or never realise they have to pay both income tax and GST.
“If they have a budget, a business owner will be aware they’ll have to hand over a proportion of the money they make to the ATO at the end of a quarter or financial year,” King says. “That means they will usually set aside some of their cash rather than spending it all.”
King points that while businesspeople often believe they are making their lives easier by not bothering with a budget, they could end up paying the price when an unexpected bill arrives. “Dealing with a large tax bill you weren’t prepared for almost always chews up a lot of time and creates a lot of stress,” King warns.
Just like neglecting to create a business plan or budget, failing to be adequately insured doesn’t create any headaches – until it does. “If they have a business loan, or work in certain industries, business owners may be required to take out certain types of insurance,” King notes. “But it’s always tempting, especially when you’re launching a business and are financially stressed, to tell yourself you’ll take out the ‘non-essential’ insurance once the business is better established.”
But taking out insurance could then be endlessly delayed.
“The longer you go without insurance, the less important it can seem,” she says. “But that means if you are injured, or your shop gets flooded, or a customer takes you to court, or your work van gets stolen, or your IT system is shut down by cybercriminals, you’re on your own.”
Not looking to the future
King says that even business owners who are conscientious about business plans, budgets and insurance policies may neglect to do much exit planning.
“Small business owners are overwhelmed with demands on their time and attention,” King says. “It’s not surprisingly so many of them are just focused on making it to the end of the day, week or month.”
Unfortunately, the self-employed don’t automatically have a tenth of their income transferred into a super fund. They need to take the initiative if they want to enjoy a comfortable, post-business life.
On that point, King warns that adopting a ‘my business is my super’ mindset is risky. “Sometimes people can offload their business for a life-changing amount,” King says. Some business people end up selling their business for less than they expected. And some business people don’t manage to find a buyer for their business at all.” The good news for time-poor businesspeople is that they can be assisted with their long-term planning by a financial adviser.
“Many business owners mistakenly assume their accountant will provide any financial advice they need, but they aren’t legally permitted to offer such advice unless they are licensed to,” King says. “If a business owner wants help working out how to plan for retirement, they need to talk to a financial adviser.”
An ANZ Financial Adviser will be happy to work with you on your personal and business goals. Find out more and book an appointment.