How to help your clients avoid common cash flow mistakes; Pt 2

6. Not separating business and personal finances

Separation of business and personal finances is critical for any small business operator, but when your company is starved for capital, it can seem like there are no other options. However, there are some very good reasons for keeping business and personal finances separate, such as:

• It makes it much easier to see your overall financial position, particularly when producing reports.
• It will be more difficult to secure credit from a financial institution if you are unable to produce clean business records.
• It can get messy around the end of financial year if you have to pay back loans to the business to avoid Division 7A tax implications.

If you do make loans to directors, shareholders or related parties, make sure that they are recorded on the balance sheet.

If you’re in the position where you’re propping up your business with your own money, just think about this for a second. The main reason that a small business has difficulty securing credit is that a financial institution has deemed, after performing its due diligence and credit checks, that lending to the business is too high a risk. If you’re in that position, take note of the reasons behind the lender’s decision.

7. Allowing the bookkeeper to manage the accounting function

Many small business owners confuse bookkeeping with accounting by allowing their bookkeeper to manage functions for which they are not qualified. Both roles are crucial to the smooth running of a business, but there are some important distinctions between bookkeepers and accountants.

Bookkeepers essentially manage the day-to-day finance function of the business; tasks such as payroll, processing invoices, and preparing and submitting business activity statements (BAS).

Accountants typically play a more strategic role which includes tax planning, ATO compliance, superannuation advice and consulting on the broader strategy of the business.

With regard to business finances, never allow one staff member to have sole control of company bank accounts. Always ensure that there is dual sign-off in place for company accounts.

8. Focusing on your work to the detriment of the business

Sure, the reason you started the business in the first place was to exercise your talents in a particular area. And you have to be a driven person to build a company from the ground up.

But in that determination to make a success of the business, I have seen many people focus too heavily on delivering products or services to customers and neglecting business administration, particularly as the business goes through the early stages of growth.

It is absolutely necessary for the owner of the business to take a hands-on approach in the early days, but the time comes when they need to delegate dayto-day functions to staff so they can focus more on business development and strategy. In this regard, it is prudent to hire staff that you feel will be able to adapt and grow with the business.

9. Not recognising or accepting when the business is in financial difficulty 

There are numerous warning signs that a small business is in trouble, but often the owners will adopt the “head in the sand” response, not wanting to accept the awful reality of the situation, or naively hoping that conditions will improve on their own.

Indicators that a business is in financial trouble include difficulty obtaining finance, low customer retention, a large number of unpaid creditors, high staff turnover and low profitability. There are options out there to turn your business around that don’t involve putting up your family home as security. Invoice finance providers, for example, will provide advice on improving cash flow and can offer finance based on the value of outstanding invoices.

10. Not having a disaster recovery plan

A disaster recovery plan, also known as a business recovery plan, is designed to minimise the impact of adverse events that are beyond the control of the business, such as floods, fires or cyber attacks.

For small businesses with limited resources, the development of a plan can be challenging but will definitely pay dividends if it is put into action. There is also a piece-of-mind benefit, knowing that your business is prepared for any eventuality.

Using a free disaster recovery plan template from sources such as CPA Australia can save time. The template includes: steps to take immediately following the disaster, the recovery plan, and the long-term disaster recovery process.