In 2017, establishing a business in has never easier and yet the challenges of creating a profitable and successful company still remain extremely high. According to the Australian Bureau for Statistics, more than 60% of small businesses and startups fail within the first three years. That’s a daunting percentage and something that has given many potential business owners reason to pause before taking the plunge into their business venture.
While there are many variables that impact business growth and success during the early stages, proper financing and monitoring small business spending are definitely two of the biggest.
In a small business environment, keeping on top of profit (instead just chasing the revenue) ends up at the bottom of the priority list, and that’s where many businesses are falling short.
It’s important for all businesses, not just small ones, to keep track of their spending, budgets, and expenses so that they can monitor where money is coming in and – most importantly – going out. Knowing where money is being spent allows you, as a business owner, to make important decisions about expenditure and resources, and where you might better invest your revenue for an even greater return profit.
Where are businesses spending their money and why? It’s a common question.
While the overwhelming answer is ‘it depends,’ recent years have seen benchmarking research being made available to offer insights to small businesses about where their competitors are pitching their financial needs.
Where you spend your money will be a reflection of a number of things including the current capacity of your business, its potential for growth, and desired business outcomes. To help you get an understanding of where you sit amongst other businesses, The National Association of Independent Business (NIAB) conducted a survey of 750 businesses with less than 250 employees.
The highest expense for those businesses? Staff wages:
Image credit: American Express Open Forum
While the NIAB focus their research within the American market, further research has shown that Australia is not so different. MYP Corp, an Australian Business Consultancy, conducted further research with over 2500 businesses in Australia to break down where they were spending their money.
By examining the financial statements of businesses across different sectors and staffing size (they included micro and large businesses), they were able to compile data that provides an excellent reference point for where businesses are spending.
As with the National Association of Independent Businesses, the biggest spending came from staff wages and expenses with an average of 50% of all the expenditures.
Across their research, they also looked at the net profit margins of the companies. They found that the average net profit before taxes across all businesses was 3.9%, but the top quartile of businesses brought in 36.7%.
Related article: Maintaining Margins as You Grow: Why It’s Important and How to Do ItFind out how keeping track of your spending can mean business success. #SMEs #Finances #Spending Click To Tweet
Many might leap to the conclusion that these were businesses who were spending more on their marketing but, interestingly enough, these businesses only spent 1.6% of their overall spending on marketing and advertisements – a mere 0.1% more than the average spending across all businesses of 1.5%.
But, the most interesting statistic that they uncovered? The expenditure of businesses on ‘professional fees.’
Professional fees refer to anything from accounting to legal, but also consulting fees, with businesses spending an average of 5% of their profit. Top businesses spent almost 2% of their net profit on professional fees.
This could infer that the advice and support they received through their consulting contracts helped them to increase turnover and profit, resulting in the overall percentage spent on these fees appearing lower.
All of the research offers interesting insights into the world of small business spending. It highlights the importance for current small business owners to analyze their own spending habits to see where they need to make adjustments in order to aid business growth and net profit.
It can also be the spark that small businesses need to get on top of this area of functioning before they make costly mistakes.
The professional software accounting group Xero held their annual Xerocon conference in Melbourne earlier this year, with the headline stating that just over 50% of Australian small businesses turned a positive profit in the previous financial year.
In partnership with KPMG, they released the Small Business Insights Report, an anonymous report based off of data from the Xero software, which showed that 49.3% of Australian SMEs were in the red.
While this percentage might seem shocking, it’s actually a big improvement on the figures from 2016.
Related article: Half of Australian Small Businesses are Running in the Red
But, what are some of the mistakes small businesses make that impact their cash flow and ability to make a positive profit?
Australian Financial Advisor, Larissa Zimmerman, advises that when going into any new business venture, it’s key to keep your eye on the big picture:
“Just like having the lid of a jigsaw puzzle so you can see the whole picture, you need to picture how you want your business to look.”
Zimmerman says that the first big financial mistake SMEs make is not having enough capital to start with. She advises that it’s important to have enough saved up to cover your first three months of living and business expenses with the expectation that you won’t be turning a profit during this time.
She also adds that it’s important to be strategic about where you put your financial resources in those early days – make every penny count.
That’s a sentiment that William Ray, a Business and Life Financial Coach, echoes. He advises that many small businesses fall into the trap of paying up front for fancy equipment and marketing campaigns to impress customers and their competition.
Related article: Five Ways to Boost Your Business’s Ability to Stay Competitive
Really, the focus needs to be on purchasing the essentials, and then working on turning a profit so you can scale up as your business – and your bank balance – grows.
Ray says that marketing is another area that can be a costly mistake for many businesses. This usually comes down to a lack of understanding how marketing investments can help business growth:
“Some businesses make the mistake of spending a large percentage of marketing dollars on general advertising. Highly-targeted advertising, networking and referrals, and improving your web presence, are going to provide a greater return on a new business’s marketing dollars.”
Related article: 5 Costly Spending Mistakes Small Businesses Make
The Australian Securities and Investment Commission has also shed some light on what might be the biggest financial mistake for small businesses: a lack of record keeping.
In a review of SMEs in 2015 and 2016, they received reports, for the first time, that “poor financial control, including a lack of records” was cited as one of the top three reasons for why a business will fail.
This most recent report found that, of the top three reasons for a business failing, financial misconduct accounted for two:
Related article: Lack of Financial Records Linked to Company Failure
It can be easy as a small business owner to get caught up in the excitement of applying your ideas and getting started. However, it’s important to make sure you’re not making costly mistakes in the beginning that could see your business closing its doors before you’ve had a chance to really get going.
Firstly, by acknowledging that the financial aspects of your business, including spending, are important for growth and success in the long term.
The next two key focuses for staying on top of spending are budgeting and accounting – and the two go well together:
A solid business budget is one of the most crucial tools when it comes to financial success. A budget isn’t about restricting your business. It’s about understanding what financial resource needs to go where and why, and what changes you can make to get the most out of what you’re spending.
A good budget provides a detailed analysis of how you expect to spend money in the future, and many businesses produce an annual projected budget to work toward.
Having a clear structure to your spending through a budget really forces you as a business owner to make strong decisions about where expenditure needs to be spent over the coming year, and where you need to limit your spending.
A budget is great as it means you are continually reviewing and reworking how you spend. It provides you with an opportunity to check market rates for the resources you’re already spending on to ensure you are always getting the best deal for your business.
A strong plan also includes the return of any expenditure, so if you plan to spend $X on a marketing strategy, it’s because you expect it to return $XX in profit and increase your budget for that department/resource.
Related article: Why is it important for a Business to Budget?
Sound accounting is also an extremely important resource for maximising not only the efficiency of your business but also for returning a positive profit.
As a business owner, to keep on top of your spending first and foremost, you need to know where it’s going and why. An efficient accounting plan and process will help you to quickly identify where money is being spent, where it’s seeing a return, and where it isn’t.
Solid accounting can project your forthcoming annual budget and can make the difference between your business getting through that unstable launch period and moving past the 3-year failure statistic.
Accounting is an area that sometimes falls to the bottom of the priority list in small business, with many owners opting to tackle this area on their own.
The good news is you don’t need to be an expert in budgeting and accounting to be able to make sure your business performs its best and spending is capped where it needs to be.
There are plenty of companies and software packages available to assist you with bookkeeping and streamlining this area of your business for optimal impact and efficiency.
This article from Build Live Give, How to Maximise Profits by Knowing Your Numbers, provides a short and sharp snapshot of what you really need to know when it comes to accounting and why it matters.
If there’s one area in which you can be certain your spending will help you secure a return, accounting is it.
Monitoring small business spending might seem like a chore, but it shouldn’t be ignored.
Finances need to be heavily factored into all of your strategic planning and can make the difference between floundering as a small business and scaling up into the world of big business.
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