Setting up and running a business is an exciting time, especially if it’s your first time, as everything is new and exciting. But how do you know if things are starting to go wrong?
Every business is different, and there’s no one-size-fits-all manual you can use to guide your decisions. But what you can do is look for patterns in your accounting that can help you spot if things are starting to slide.
1. You keep seeing “unexpected” costs
While every business encounters unexpected costs, if you start seeing them every month, it could be a sign that your accounting isn’t up to scratch.
For example, if your rent agreement has a section saying there’s an annual 5% increase, you shouldn’t be surprised if your rent increases by 5% annually. However, if you forget to include it in your cash flow forecast, it could be deemed an unexpected expense.
This isn’t the only place “unexpected” costs can come from, so you need to keep an eye out for the following:
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Subscription-based services, no matter how small the monthly payment is, it can still add up in the long run.
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Software or tools that you’re currently underusing and, therefore, not thinking about regularly. Consider whether you still need the software or tool, or whether you can move it to a Pay As You Go model.
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National Minimum Wage/Living Wage increases if you have staff members. Typically, these are reviewed annually, meaning you should be prepared for any future changes.
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Increases to rent, bills or insurance. Typically, these go up whenever they need to be renewed, and while you might not be aware of how much they are going up by, you can still be prepared for a general increase.
If you encounter these as a one-off, they tend not to cause too much trouble; however, if it’s a regular occurrence in your business, you might need to reevaluate your expenses.
2. You can’t figure out why your profit margins are shrinking
If revenue is increasing, but your profit margin is remaining low, you need to investigate the cause. Typical causes can include, but are not limited to:
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Attempting to beat competitors on the price of similar products can lead to lower-than-expected profit margins.
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Higher than anticipated production costs can eat into your profit margins without you realising. This could be due to suppliers including hidden fees or the production taking longer than anticipated, leading to higher staffing costs.
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Rising production costs are not being passed on to the end customer.
All of these can erode your profit margin without you realising there’s a long-term issue. Addressing these problems may require you to carefully analyse your income and expenses to ensure your costs are fully covered.
3. Poor record-keeping
If you’re manually entering all of your accounting data, it’s easy to get bogged down and fall behind. This means your transactions might not be up-to-date, which won’t give you a complete picture of your business’s health.
If you’re not tracking your monthly income and expenses, how can you determine your current profit margins or assess whether your business is improving or stagnating?
By using automated accounting software, you can track your receipts and invoices easily, all in one place. Most of these platforms also have the option to link your bank account to ensure all of these documents have a corresponding transaction and that nothing has been lost or left unpaid.
Don’t leave your accounting down to chance; by keeping on top of it, the overall health of your business can be tracked and improved.