#SME&U

11 Oct 2020

Top Accounting Mistakes Every SME Makes

by RAKBANK
hidden-business-costs-overheads

As an entrepreneur, there are various challenges to deal with - sales, investors, demanding customers, cash flow, competition, regulations, hiring. The list never ends. It's always a race against time and money. Studies indicate that on average, 60% or more of businesses fail within the first 18 months - despite raising capital from banks, investors, fast growing market and having customers. 


 
What's the reason for such high mortality? Undoubtedly, the company had a plan, they all worked hard, and the team was skilled. The reasons are poor decision making. Decisions are made based on data, numbers that must be accurate, reliable and realistic - this is where accounting can help. 
 


We explore the common and (sometimes fatal) mistakes that SMEs make

 


 
Improper Bookkeeping

 

Accounting records what goes in (sales) and goes out (expenses). If not done in a timely and accurate number, the business is doomed. However, as an entrepreneur, the focus is on more exciting stuff - goals, vision, marketing, fundraising, strategy and the product. Seldom do entrepreneurs focus on this, instead pour over Excel spreadsheets, paper or 'guesstimate' when asked. 


 
Over time, the records are in a mess, incomplete, outdated, and it's challenging to rectify - too little, too late. Putting proper accounting software such as Sage, Tally, Wave, Xero, FreshBooks from day 1 with clear budgets, policies and process is a good start.

 

Maintain proper paper trail of all contracts, receipts, documents - scan and keep both physical copies offsite. Even then, there could be genuine (or intentional) human errors that create a risk. Putting in place quarterly and annual third-party audit to identify issues and help with a course correction. 
 

 


High Burn rate

 

New businesses tend to get carried away with the 'grow fast, grow big' 'beat competitors at any cost' mind-set. Unwittingly, they take on more costs than it can sustain by hiring too many too soon; splurging on fancy office, flashy marketing, more inventory they can sell, too many loans and so on. They tend to be heavy on CAPEX leaving limited liquidity for operating expenses (OPEX). 


 
Simple decisions have knock-on effects. For example, a decision to hire not only involves basic salary but incremental costs like training, visa, deposits, insurance, gratuity, paid leave, office space, etc. Inflation of 4-5% and VAT of 5% can also impact the numbers. Be frugal and spend only on essential items that will directly drive in sales. 

 


 
Owners Not Involved

 

Often entrepreneurs cite busy schedules or lack of knowledge and say, 'This is the job of my Accountant' or 'I am not a Finance guy!'. While it is true, accounting is a specialized skill, the buck or assets and liability/risk stop with the entrepreneur, who's the signatory.

 

There are basics to know, as ignorance is not an excuse. Understanding key ratios, cashflow analysis, or reading financial statements is a must. Hire a part-time accountant or a 'virtual CFO' to guide you. Or self-learn from YouTube, Coursera etc. which have great video tutorials 

 


 
Pricing Pitfalls

 

If a product or service is overpriced, it risks losing customers. If underpriced or discounted for drum up sales with gimmicky marketing, it loses money. If not appropriately priced, it ends up with low or no margins causing losses. Pricing is an art and science. Not understanding costs incurred in running the business can be expensive. End of the day, it's the customers who pay for your business.  

 

 

Reconciliations

 

Whether its bank statements or money from sales/debtors or paid to expenses/creditors, it should be tracked with a clear paper trail. It's possible with appropriate and periodic reconciliations. Quite often, entrepreneurs fail to answer basic questions such as 'What's the project margin?' 'What your expected sales in 3 years?' 'When do we break-even?' With proper accounting, such answers are easier.

 


 
Managing Cashflow

 

Cashflow defines your ability to meet immediate and short-term commitments. You could be sitting on huge sales pipeline, great, but your payment terms are 90 days of delivery, but customers rarely pay on time; your suppliers demand 100% advance; wages and other bills are payable monthly, then the business will surely have chronic cash flow issues as there is no sync. Hence, a proper cash flow forecast for 90 days is vital. 

 

 

Accounting is simply recording numbers what a business does. If the numbers don't add up, nothing else will. 
     
 
 
 


Tags :




Top Accounting Mistakes Every SME Makes

11 Oct 2020

hidden-business-costs-overheads

Tags :

As an entrepreneur, there are various challenges to deal with - sales, investors, demanding customers, cash flow, competition, regulations, hiring. The list never ends. It's always a race against time and money. Studies indicate that on average, 60% or more of businesses fail within the first 18 months - despite raising capital from banks, investors, fast growing market and having customers. 


 
What's the reason for such high mortality? Undoubtedly, the company had a plan, they all worked hard, and the team was skilled. The reasons are poor decision making. Decisions are made based on data, numbers that must be accurate, reliable and realistic - this is where accounting can help. 
 


We explore the common and (sometimes fatal) mistakes that SMEs make

 


 
Improper Bookkeeping

 

Accounting records what goes in (sales) and goes out (expenses). If not done in a timely and accurate number, the business is doomed. However, as an entrepreneur, the focus is on more exciting stuff - goals, vision, marketing, fundraising, strategy and the product. Seldom do entrepreneurs focus on this, instead pour over Excel spreadsheets, paper or 'guesstimate' when asked. 


 
Over time, the records are in a mess, incomplete, outdated, and it's challenging to rectify - too little, too late. Putting proper accounting software such as Sage, Tally, Wave, Xero, FreshBooks from day 1 with clear budgets, policies and process is a good start.

 

Maintain proper paper trail of all contracts, receipts, documents - scan and keep both physical copies offsite. Even then, there could be genuine (or intentional) human errors that create a risk. Putting in place quarterly and annual third-party audit to identify issues and help with a course correction. 
 

 


High Burn rate

 

New businesses tend to get carried away with the 'grow fast, grow big' 'beat competitors at any cost' mind-set. Unwittingly, they take on more costs than it can sustain by hiring too many too soon; splurging on fancy office, flashy marketing, more inventory they can sell, too many loans and so on. They tend to be heavy on CAPEX leaving limited liquidity for operating expenses (OPEX). 


 
Simple decisions have knock-on effects. For example, a decision to hire not only involves basic salary but incremental costs like training, visa, deposits, insurance, gratuity, paid leave, office space, etc. Inflation of 4-5% and VAT of 5% can also impact the numbers. Be frugal and spend only on essential items that will directly drive in sales. 

 


 
Owners Not Involved

 

Often entrepreneurs cite busy schedules or lack of knowledge and say, 'This is the job of my Accountant' or 'I am not a Finance guy!'. While it is true, accounting is a specialized skill, the buck or assets and liability/risk stop with the entrepreneur, who's the signatory.

 

There are basics to know, as ignorance is not an excuse. Understanding key ratios, cashflow analysis, or reading financial statements is a must. Hire a part-time accountant or a 'virtual CFO' to guide you. Or self-learn from YouTube, Coursera etc. which have great video tutorials 

 


 
Pricing Pitfalls

 

If a product or service is overpriced, it risks losing customers. If underpriced or discounted for drum up sales with gimmicky marketing, it loses money. If not appropriately priced, it ends up with low or no margins causing losses. Pricing is an art and science. Not understanding costs incurred in running the business can be expensive. End of the day, it's the customers who pay for your business.  

 

 

Reconciliations

 

Whether its bank statements or money from sales/debtors or paid to expenses/creditors, it should be tracked with a clear paper trail. It's possible with appropriate and periodic reconciliations. Quite often, entrepreneurs fail to answer basic questions such as 'What's the project margin?' 'What your expected sales in 3 years?' 'When do we break-even?' With proper accounting, such answers are easier.

 


 
Managing Cashflow

 

Cashflow defines your ability to meet immediate and short-term commitments. You could be sitting on huge sales pipeline, great, but your payment terms are 90 days of delivery, but customers rarely pay on time; your suppliers demand 100% advance; wages and other bills are payable monthly, then the business will surely have chronic cash flow issues as there is no sync. Hence, a proper cash flow forecast for 90 days is vital. 

 

 

Accounting is simply recording numbers what a business does. If the numbers don't add up, nothing else will.