According to an article by smallbusiness.co.uk based on research by Ormsby Street, about 20% of small businesses fail in their first year and 50% fail in their fifth year. Poor cash flow remains one of the most consistent reasons companies go out of business.
Another study by Ormsby Street found that freelancers are particularly vulnerable:
- One in ten freelancers has faced difficulties in paying their mortgage or rent because of late invoice payment.
- 37% have turned to family members for loans, while 36% have gone to payday loans companies.
- On average, freelancers’ invoices are paid 18 and a half days after their due date.
- At any one time, a freelancer in the UK is owed an average of £5,431.03 in late payments.
- 79% of freelancers say that cash flow is the number one concern for their business.
As shocking as these statistics are, most financial experts agree that small businesses and freelancers often make common financial mistakes that contribute towards their lack of cash flow.
But what are these common financial mistakes and how can you avoid them?
- Overpaying their taxes
Naturally, every business in the UK earning over the current threshold must pay taxes. However, a surprising number of companies forget to claim a whole host of deductible expenses when submitting their tax returns. Travel expenses, use of utilities in a home office, software, postage, entertaining clients, etc. can all be counted as an expenditure that can be deducted from your freelance income.
Tip: No matter how small the expense, it’s worth hanging on to the receipt and keeping a record of the purchase in your books. Having a dedicated business account makes it easier to track any money you spend on running your business.
Many businesses make the mistake of spending more than they have coming in. Yes, there is some truth to the saying that you have to spend money to make money but, equally, if your outgoings consistently outstrip your income, you may need to cut back.
Tip: Ask yourself whether you really need to make a purchase and also look at how profitable the purchase has the potential to be. It’s also important to track your income and outgoings so that you can spot when you’re overspending and reign things in for a while.
- Impulse spending
It can be easy to get distracted by what your competitors are doing or bright shiny objects that you think will make a difference to your business but buying things on impulse is rarely a good idea.
Impulse spending is often a problem for start-up businesses. A big desk, posh coffee machine, or all-singing, all-dancing printer might seem like an investment but do you really need them or are there cheaper options available?
Tip: Before you make a purchase, assess whether it will contribute to your business in some measurable way.
- Lack of budgeting
Another common financial mistake small businesses make is to plough ahead without establishing a budget. This puts you at risk of spending more money than you’re making or not spending enough money to enable your business to compete in the marketplace.
Tip: Write down your business goals and work out how you want to apportion your budget to meet those goals.
- Ignoring the business plan
This ties into the point above – many businesses go ‘off plan’ with their spending, losing sight of their goals and creating expenses that won’t move the business forward.
Tip: Review and revise your business plan – each time you plan to spend money on your business, ask “Will this purchase take me nearer to reaching my business goals?” If the answer is ‘no’ then it might not be the best way to spend your money.
- Too many fingers in too many pies
As your business becomes more established, you may decide to look for new opportunities and avenues to diversify your offering. However, this may be premature and can result in you spreading your attention – and money – too thinly.
Tip: Look at your business model and decide whether it would be better to strengthen your current training offering before you diversify your services.
- Busy but not productive
Of course it takes hard work to run a successful business but, in the long-term, it won’t do anyone any favours if you run yourself into the ground. Sometimes, we business owners confuse being busy with being productive when the two are often very separate things.
Tip: Sit down and review how you’re spending your time – there is some great time tracking tools out there. Can you spot where you’re wasting precious time (and money)?
Tip: Make a list of tasks that you could outsource or automate and delegate them as appropriate.
Have you made one or more of these common financial mistakes while running your training business? What’s the best advice you’ve ever been given about managing your business finances? I’d love to hear more about your thoughts and experiences.
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