Starting a business is exciting as well as risky. Financial management is one major aspect that troubles many SME owners. Most of them suffer a major setback due to a lack of proper accounting knowledge.
Here are some basic mistakes that the majority of small business owners make and wish their accountant would have suggested acting differently upon.
1. Not Having a Long-term Financial Plan
One of the most common accounting mistakes made by SME owners at the initial stage is making only short-term financial plans. They get too involved in solving immediate financial crises. As a result, long-term vision and financial goals get sidelined. Such businesses get entangled in solving problems as they incur rather than using a preventive approach.
This hinders the growth of SMEs. You should always plan ahead and take steps to avoid financial crises before they even happen. This will give you time to focus on other important aspects of businesses such as customer service, product innovation, marketing, etc.
2. Using Personal Funds for Professional Purposes
The popular “Don’t mix your personal and professional life” philosophy also applies to financial investments of businesses. The line may be blurred at the initial stage because many entrepreneurs use their own savings to pay business-related bills like office rent, electricity bills, and furniture costs.
However, accountants should always give the startup advice to maintain a separate ledger for all business-related expenses to SME owners. This makes tax calculation and profit-loss statement preparation less messy in the accounting apps like Tally app. A separate business bank account makes cash flow tracking much easier.
3. Not Having a Backup Funding Plan
The economic environment is rapidly changing in the present day scenario. Strategies working in favour of business today might become redundant tomorrow. Demands of customers shift everyday in a different direction due to innovations and technological developments.
Under such circumstances, an SME must have a pool of reserved funds. This will keep the business running if any adversity happens and gives SME owners time to develop a new strategy.
Some accountants get too busy solving the immediate problems and thus fail to secure a financial backup. This pushes organisations into funding distress whenever a new challenge hits them.
4. Lack of a Clear Financial Budget
Many SME owners make business-related expenses without any proper financial budget. Consequently, you might spend money on something trivial in that scenario instead of investing it in immediately important aspects.
A proper financial budget helps figure out which department (marketing, operations, etc.) needs more focus. Hence the funds are better utilised. An accountant must suggest a proper financial budget for diverting money towards the profitability of a business.
5. Advice on Different Registrations and Cash Savings Available
First thing that any SME owner should do is registration at udyamregistration.gov.in. This makes them eligible for loans at lower interest rate (1-1.5%), discounts on establishment expenses, and government tenders.
Next step should be registering for GST. Every product-based SME crossing 40 lakhs in turnover and service-based SME exceeding 20 lakhs turnover in a year has to register for GST. Most SME owners procrastinate this process and thus face a penalty of 10% on tax or INR 10,000 whichever is higher.
PF and PT registration should be the other priority for SME owners employing more than 20 people. Most of them try to skip this step by showing a lesser number of employees or not depositing funds on time. Such actions are harshly penalized by the government and your organization may also get blacklisted.
Cover all the above basics, have a fool-proof financial budget and always think a step ahead. This will save your business from a lot of financial troubles.