How to avoid basic bookkeeping errors as a small business

Many businesses that go bust are profitable, but have hit financial problems through taking on too many projects. Here, Lee Murphy looks at how to make sure you avoid this fate.

What is the tell-tale sign of a successful small business owner? Easy! When you ask them about their ‘numbers’ they are on top of them; no bookkeeping errors. They know the key ones and are watching them assiduously.

But what are the key numbers? Sales targets are certainly vital. Any business that is going to grow quickly needs to be sales led. Sadly, it is few of us that will come up with a piece of technology or whatever that is so amazing it sells itself. So sales targets and performance are vital.

Specific businesses will have ones that are vital for them. For instance, for restaurants it is the number of covers per night, for shops it is usually footfall, while online businesses will have targets around website traffic and the performance of key pages. For my business, Pandle, the key metric I focus on is our total user numbers, their percentage growth and out Net Promoter Score. This latter one measures the willingness of our customers to recommend Pandle to others, and as getting recommendation is an important form or growth for us I watch it very closely.

What are the key ones for your business? Do you monitor them and, if not, why on earth not?

For all businesses, no matter what size, key financial measures need to be central too. It is worth noting that many businesses that go bust are profitable, but have hit financial problems through taking on too many projects causing them to run out or cash before the payments have been received. Here is how to make sure you avoid this fate:

Why a cash flow forecast is key

Cash flow problems are the biggest killer of small businesses, with recent research showing over 70 per cent of small business owners see it as their biggest threat.

The key to avoiding financial problems is having a regular cashflow forecast, effectively a chart showing, for the next year, how much money you will be paying out and how much money is coming in each month.

For instance, it is easy to think things are going well because there is lots of money in the bank. But running your business only based on scanning the bank statement is heading for disaster as most of it won’t be yours!

A particular problem that afflicts many owner-managed businesses is their owners viewing the money in the business account as their own money and continually dipping into it for life’s luxuries! The end result of this is a big tax bill down the line, but the money needed has already been spent.

A cash flow forecast helps prevent this and other problems, or at least makes sure you go in with eyes wide open, and the good news is that today its easier than ever to manage the money in your business thanks to new cloud-based applications and online bookkeeping tools.

Many of them are free and their cash flow tools will make it a quick process. Pandle, for example, gives real time cash reporting and forecasting so that you can easily spot current or future cash flow problems and react.

The general rule is to make sure you have at least three months of reserves so you can ride out a bad time or an unforeseen problem, such as you or a key person being ill for a long period.

This is particularly important as sales increase. Many businesses go under from ‘over-trading’ because they incur lots of upfront costs from having more sales and they hit financial difficulty before the payments are received.

Getting money in early and ‘debtor days’ down

This is particularly the case with businesses that have high upfront overhead costs. It is also a big danger where you have a large client who insists on paying slowly.

For instance, if a business customer takes 69 days to pay, which is the average wait for some sectors to get their invoices paid according to research by Funding Options, you have to carry the materials, staff and VAT costs for at least two months before you receive money.

That is quite a burden on any business. Making sure you regularly monitor your ‘debtor days’ and getting it down to as low as possible will give you the most possible cash and security.

The two main ways you can reduce the amount you are owed is:

  • Get as much money in as early as possible from customers. Thinking about how you can get more money up front or otherwise in phases is critical, especially if you are invoicing a large business with long payment terms or a reputation for paying slowly. Think about all the things you can do, such as: asking for an up front deposit; having payment terms of 7 or 14 days instead of 28; and billing in phases rather than at the end.
  • Be really hot on getting people to pay on time. Sadly there are lots of businesses that need chasing before they pay, and there are also others who are pretty disorganised. Overcome this by being organised with your reminders and chasing… if necessary, have a team member whose job this is. With online bookkeeping software you can often automate this so it happens quickly and efficiently. The best businesses start sending out reminders a few days before payments are due and then quickly start chasing straight after the due date, not weeks afterwards or even at the year end!

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Make sure the price is right

Be really thorough about working out prices so you build in everything, rather than just applying a good sounding mark-up, to ensure your prices cover not just the basic inputs but also a share of your overhead costs and also some ‘profit’ for you.

You often see this on old episodes of The Hotel Inspector where she gets hoteliers to add up the costs of the ingredients of their breakfasts. Many are horrified to find out that the cost of all the sausages, eggs and rashers of bacon is actually more than they were charging…they had effectively been paying their guests to eat their breakfasts, not vice versa!

“Price changes typically have a much bigger impact on profits than sales increases”

It is easy to mock, but many businesses inadvertently do this by not taking into account all their overheads and often forgetting to build in income for the owner.

Problems with low prices get compounded when businesses offer discounts to win work. It is one thing to price competitively to win work for a strategic reason, such as breaking into a new sector. It is quite another to cut prices to simply keep yourself busy: that route leads to misery as you work all hours for no income, while you are too busy to find profitable clients.

For instance, say your monthly sales are £20,000 for ten units and you have total variable costs of £10,000 then you have gross profit of £10,000 (a 50 per cent margin). If you cut prices for the following month by 10 per cent and got a 20 per cent boost in sales , would you be better off?

In this case your sales would now be 12 units at £1,800, that is £21,600 with a gross cost of £12,000. So you would get £9,600 gross profit rather than £10,000, so you have inadvertently made yourself £400 worse off despite increasing turnover by £1,600.

The key lesson is that price changes typically have a much bigger impact on profits than sales increases. So, while you definitely need to focus on sales to grow your businesses, you must have the information to make sure you are getting sales at the right price.

For your business, charging a higher price, even slightly, will have a much bigger impact on profits than increasing sales, especially where you are pricing low. For your business, know the profitability of sales and think how you can put up your price for certain items without it hurting sales, for instance through having a premium level of service or charging for certain optional extras.

If you master your bookkeeping you master your financial destiny and can be confident you are making profitable sales. It is not rocket science and with the wide range of software available online, often free, it has never been easier to make sure your prices and profits are right.

Lee Murphy is the founder of Pandle.

Related: Small business bookkeeping software – We compare 7 of the best solutions for keeping track of income and expenditure

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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