When running a business in the UAE, a huge part of its success is the proper budget allocation. Also, it is required of a business to maintain a healthy bottom line as it’s the key for it to grow. However, this is easier said than done. Many businesses in the country make the same mistakes financially, and they are as follows:
Not retaining a plan or budget for the year
The chances of a business achieving something that’s meaningful and beneficial to its growth are slim if it does not have a goal or target that it can aspire to. We all know that a goal that does not come with a plan is simply a wish. This is especially true with planning and budgeting for a business. A budget is essentially a system that comprises checks and balances which all make sure that the business is focused on meeting its goals. A budget can also measure the progress of the business along the way. Failing to have a plan for the business will often result in having expectations that can negatively affect the company and put off all investors.
Setting time in collecting necessary data from different staff members and departments within the business can significantly increase its likelihood of succeeding. Key questions which a business plan or budget has to have an answer for are the following:
- How is business spending money or will it be spending money?
- How is the company making money?
- What is the business plan’s unit economics?
- How is the business generating cash and what’s the runway and burn rate?
- When and how can strategic milestones of the business be achieved?
- When is the business going to reach a break-even?
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Failing to comply with relevant business tax laws
A startup has to make sure it is knowledgeable about the types of taxation it is subject to. It’s an important legal issue as it’s vital for the company to settle all its dues to the government. Apart from knowing the taxes that are applicable to the business, it also has to know when and how taxes are to be paid to the regulators. Not having the correct tax mechanisms, especially for Value Added Tax (VAT) in UAE, can lead to numerous legal issues.
It is recommended for a business to hire regulated tax agents in UAE to help it keep track of all its taxes and avoid acquiring huge fines and penalties.
Poor cash management
Cash management is absolutely necessary for every single business. However, it is especially crucial with SMEs that have little to no runway in attaining the next milestone. A massive percentage of businesses get cash burn estimates wrong. It’s mainly due to the absence of good planning, financial expertise, as well as high expectations. The following can help in having proper cash management for the business:
- Understanding the cash conversion cycle (oftentimes, billed customer invoices do not automatically turn into cash when it reaches the bank)
- Having a regularly updated and realistic forecast for the business (expenses, revenue, and cash)
- Start looking for extra funding early on. The business should not wait until it has run out of cash. It takes three to six months for a business to close an investment round. In order to shorten the timeframe plus secure a commitment the earliest possible, the business has to stay engaged with all its potential investors and make sure it keeps them updated regarding traction and progress
- When fundraising, it’s advised to secure the money that can last the business at least a year to a year and a half in order to help reach its next milestone. If the business runs out of money prior to reaching a milestone, overall attractiveness and valuation to VS will most likely drop.
Not making profitability the focus of the business
Acquiring new clients without retaining a business model isn’t a good idea. The approach can help the business build momentum and get initial traction; however, it will have to be profitable and sustainable otherwise every new customer that is acquired will magnify losses and put the business a step closer to it filing bankruptcy.
As a general rule of thumb, profits from every new sale that the business makes has to cover direct expenses that are related to the provision of the product or service sold plus a margin on top. A calculation that is done by professionals is how many brand new agreements or customers have to be closed in reaching break even or reaching a target. For subscription businesses, a simple calculation in reaching breakeven is diving monthly operating expenses of the company by monthly gross profit each new client or customer generates.
At VAT Registration UAE, we provide critical financial advice for SMEs and startups. Call us today!