The financial blind spots that can put small businesses on the back foot

Hiscox research has found that 45% of aspiring entrepreneurs lack the confidence to start a company because of gaps in their business knowledge. 

But uncertainty around terminology and comprehension doesn’t necessarily disappear once a company is established.

Separate research from Capital on Tap discovered that 52% of UK business owners believe unfamiliarity with business jargon has cost them important opportunities, while 42% said complex business language had cost them financially. 

Misunderstanding business terminology can make it harder to assess your company's financial position, weigh up funding options and recognise the implications of taking on new commitments. Understanding the numbers behind a business is, therefore, essential to making informed, productive decisions.

Pricing

Strong turnover can sometimes create a false sense of comfort. A business that wins work by pricing low may see sales climb while the profit on each job shrinks. Reviewing costs alongside revenue can help owners understand whether their prices are sustainable.

Cash flow

Your business can be profitable but still struggle to pay its bills if customers take longer to pay their invoices than you have to pay your suppliers and staff. Forecasting when payments are due and when money is expected to arrive can help you plan ahead, maintain a suitable cash reserve and prepare for quieter periods.

Tax liabilities should also be factored into business plans. Setting aside money for VAT, corporation tax and other upcoming costs can help prevent an unexpected bill from putting pressure on day-to-day finances.

Borrowing

Finance, when used effectively, can help businesses manage cash flow, purchase equipment, recruit staff or fund expansion. Understanding the terms of a loan or business credit card, including interest, fees and repayment requirements, can help owners compare options and decide which suits their needs.

It's also important to consider how repayments fit alongside existing commitments and expected income. A clear view of cash flow can help owners borrow with greater confidence and plan for repayments without putting other financial obligations under pressure.

Growth

Expanding your business can mean investing in new equipment, increasing stock levels, hiring staff or moving to larger premises. Understanding the associated costs can help you assess whether your business can afford to expand and how much funding you may need.

Setting aside money in a business savings account can help you build a financial buffer for unexpected expenses and future investment while earning interest on money that isn’t needed immediately.

Making your money work for your business

Keeping track of what comes in, what goes out, what you owe and what you have available can give you a strong foundation for making financial decisions. Regularly reviewing accounts and cash flow forecasts can help you identify potential shortfalls, prepare for upcoming expenses and assess when you can afford to invest.

Of course, you don't need to manage every aspect of your finances alone. An accountant or financial adviser can help you interpret figures, understand your obligations and assess your options, but knowing your numbers can make those conversations more productive and ensure you ask the right questions.