Very profitable businesses have been shut down because their owners thought they were not making money, and that comes down to a catastrophic accounting error. As an entrepreneur you are not required to understand advanced accounting terms, but you do need accounting advice, whatever the size of your business.
To give just one example, the difference between having accounting advice and not having it can mean savings of more than €2,000 thanks to tax deductions you probably did not know about, though that is another matter.
1. Entrepreneurs who do not know the difference between profit and cash flow.
A business can have positive cash flow in the short term and not be profitable in the long term. In the same way, it can have negative cash flow in the short term and be very profitable in the long term. Where is the difference between these two scenarios?
Let us explain it with a simple example. A small business, especially one that has only just opened, does not have the bargaining power with suppliers that a large company has, or that a business which has been working with its suppliers for decades has.
a) If the small business pays its suppliers at 30 days and collects from its customers at 60 days, alarm bells may ring when its accounts show continuous temporary losses for months, and that does not mean it is losing money.
b) A company that pays its suppliers at six months and collects from its customers at 30 days will have positive cash flow at all times, which does not mean it is making money, since it could be piling up losses every month. “The company was doing so well, and then it suddenly closed.” It did not close suddenly, and it was not doing well at the start either.
It is hard for an entrepreneur to have the time or knowledge to know the true situation of the company at every moment, and that is why an accountant or a gestoría (an advisory firm that handles bookkeeping and paperwork for small businesses in Spain) can balance the real accounts every quarter to tell us how our finances are doing.
2. Entrepreneurs who mix their personal finances with the company’s finances.
This is one of the common mistakes made by Spanish business owners: not properly separating the company’s income and expenses from those of the household. Some entrepreneurs say their business is not profitable because it does not cover the mortgage on their home, the payments on two cars and the insurance, on top of workers’ wages and the rent on the warehouse. The reality is that the business is perfectly profitable; what fails is the excessive spending this entrepreneur has outside the company.
When someone starts a business, they need to keep the two sets of accounts properly separate, because it would be very sad to cut wages in the company in order to pay for a high-end car in your own name.
Another accounting mistake is not keeping receipts for personal purchases so they can be included as business expenses and deducted. If you have a business, petrol is deductible, so are meals in restaurants, even a suit or a vehicle (as long as it is in the company’s name), and so on.
Of course, we will also need professional advice to know whether it suits us to buy a vehicle as a company asset or personally, because various circumstances can arise that, one way or another, could put some of our assets at risk.
A professional accountant will also help you draw up a clear plan for how much of the profits you should reinvest in the business, and to record correctly in the books the company money that has gone to pay personal expenses. That way, we may not have enough to pay the mortgage, but at least we know the business is making big profits.
In short:
Poor accounting management is often said to be one of the main causes of small businesses closing. An accountant does not have to be a fixed cost for the company, since you can hire one part time. And just as investing in advertising is not an expense, advice on matters we know nothing about and that are vital to our business should not be seen as an expense either, because it saves effort, time and money.
Featured image: Unknown author, Public domain, via Wikimedia Commons.
