5 Common Financial Mistakes that Kill Small Businesses in Africa. Number 3 Is the Most Deadly! Written by smallstar

Number 5 Is the Most Deadly!
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5 Common Financial
Mistakes that Kill Small
Businesses in Africa.
Number 3 Is the Most
Deadly!
Written by smallstarter ThinkTank
Monday, 07 April 2014 14:17
Add new comment 29 Comments
I’m sure you would have heard the notorious statistic
that nearly 80 percent of small businesses that start
today may die within the first 18 months. This is both
a sad reality and a mindblowing suicide rate by any
measure. I call it ‘suicide’ because most small
businesses actually kill themselves without knowing
it. Entrepreneurs and small business owners often
form bad habits and make harmful decisions that
ensure their businesses don’t survive. Don’t get me
wrong; a business can fail for several different
reasons. Some of these reasons are external (like a
bad economy) while many of them are internal (you
and the way you run the business). Sadly, poor
financial management is one of the biggest internal
reasons for business failure. This article looks at five
common finanical mistakes that small businesses
make in Africa. If you already run a business, no
matter how small, you may already be guilty of a
few. Let’s find out what these mistakes are…
Yes, it’s Always About The Money!
Every business (small and big) exists to make money. Period!
Unless you run a charity, social program or some other form of
not-for-profit organization, very few people would continue in a
business that doesn’t make any money. If the goal of business
is to make money, it only makes sense that entrepreneurs and
small business owners would know how to manage their
finances quite well, right? Unfortunately not!
Many entrepreneurs do not understand that a business is a
living thing. And money is like blood to every business. If it
doesn’t flow well, there will be trouble. If you let it waste or leak,
the business will fall ill, weaken and probably die. Financial
illiteracy is probably one of the biggest self-made reasons why
thousands of businesses fail in Africa every year.
It’s not enough to have amazing business ideas . You need to
understand money too! It doesn’t matter how wonderful your
product or customer service; if your business runs into financial
trouble, you’ll be unable to pay the shop/office rent, pay
salaries or enjoy any profits. This article will be the first of
several financial literacy lessons I’ll share with you to open
your eyes to the dangers of poor financial management in your
business.
Let’s now take a look at five serious and common mistakes
most entrepreneurs are likely to make when they start and run
their dream small business…
#1 - Not Keeping Financial Records
Financial records are like temperature readings of your business.
They provide important and invaluable information that acts as an
advance warning system to alert you before something goes
wrong. Most times, businesses don’t fail without showing signs
and symptoms. How else would you know that your costs are high
and rising out of control if you don’t keep records of monies
you’ve spent? How can you know that your goods are being stolen
by your employees if you don’t regularly take stock?
Accountability is a basic ingredient of success in any
business (big or small). How can you be accountable
when there are no records to prove it? How can any
business succeed if it lacks the discipline to keep
records? How can you know if you’re making profits
(or losses) if you don’t write down or record your
incomes and expenses? There’s just so much you can
store in your head. Sometimes (and many times), your
head may forget some transactions you made. But a
little notebook, a file on your computer or a business
management app will never forget. (photo credit:
brightblue-solutions.com)
Keeping accurate and up-to-date records of financial
activities in your business is not just for your own
sake. Should you require capital investment from
banks and investors, you would need to first prove that your
business is profitable and can pay back the interest and returns.
And how exactly do you prove that your business is profitable if
you don’t have any records to support your claim? Nobody wants
to invest in a business that cannot account for the money it spends
or makes. Trust has to be based on something and keeping good
records of your business transactions is solid enough for trust to
exist.
Don’t be scared; you don’t need to be an accountant (and you don’t
need to hire one) to keep good records. Keep it simple simple and
basic. You can start out by recording the date, amount and some
details about the transactions and you’ll be fine. Fortunately, small
businesses usually don’t have the kind of complex transactions
that exist in large companies. If you can pinch your pennies right,
your small business could one day grow into a big company that
hires a team of accountants and financial managers to handle its
finances.
#2 - Confusing Revenue With Profits
It’s very important that entrepreneurs understand the
difference between these two terms. Revenue (also
known as Sales or Turnover) is the money that flows
into your business from selling your products or
services to customers. Profit is the difference
between money that flows into your business
(revenue) and money that flows out of your business
(costs).
I was once involved in an oil trading business that had
revenues of nearly $60,000 per month. A lot of money
right? Successful business, right? Well, I wish you
were right. Although we had all this money coming in,
we were not making any money (profits) at all. The
business was actually bleeding and losing money.
Even though we had a growing number of loyal
customers who enjoyed our service, we had to make
the difficult decision to close down.
Many small businesses suffer the same fate. Their
shops are always overflowing with customers; there’s
a lot of money coming in but the business isn’t
profitable. High costs are usually one of the biggest
reasons for a business with a high amount of sales/
revenue but low or non-existent profits. It doesn’t
matter how much money (sales or revenue) your
business makes, if your costs are too high, you’re at
risk of running a loss. If you hire more employees than necessary
(which means high salary costs) or take out a bank loan with a
high and unfavourable interest rate, your business would likely
bleed to death. The unfortunate thing is, it may look healthy on the
outside, but it's very sick inside. It will only be a matter of time
before the business crumbles.
Why did the oil business that seemed to make a lot of money still
fail? Two reasons. First, in the retail segment of the market, the
profit margin between the cost and sale price of oil is quite small.
So, although we sold large volumes to earn high revenue, the profit
was little. Second, we took out a bank loan at a time when interest
rates were just too high. Whatever little profits that remained were
wiped off by the high interest payments we had to make to the
bank. At the end of most months, we were making losses.
Although the business was fun and our customers loved us, we
had to quit.
Morale of this story: Don’t confuse revenue with profits. No profits,
no business!
#3 - Spending Money On Things You Don’t Need
Let’s say you have a brilliant idea and you’re excited about finally
starting your own business. You spend some of your capital on
designing a beautiful logo for your product brand. You pay a
consultant to design an amazing website so everyone would know
you’re a person of style and class. You hire a Personal Assistant
and Secretary and rent a large office space in a nice part of town
(even though you realise that the space is too large for your
requirements). You’re spending all this money because you plan to
start your business with a bang. (photo credit:
learnvest.com)
Action time! You launch your business. You have
already spent half of your capital on all the ‘flashy’
stuff. But you’re not worried. Business will be good.
People would see your logo, lovely website and
beautiful office space and rush in to become your
customers. One month passes; another nine months
follow and business hasn’t turned out to be as rosy as
you thought it would be. The problem is, you’re
running low on working capital. In another few
months, the rent would be due for renewal and you
may not have the money to pay for it and still pay
staff salaries. If only you hadn’t paid for such a big
office or hired too many employees, you would have
had the money to survive a little longer.
Unfortunately, this scenario is a common reality that
affects many small businesses in Africa. We are often tempted to
be perfect and get it right from the very start. The truth is,
entrepreneurs really don’t need a lot of stuff we spend money on
at the beginning of our businesses. We often waste the precious
capital we need to keep the business alive. By the time we realize
our mistake, it’s usually too late to make any amends.
Don’t get me wrong. If you have an eCommerce business that
primarily sells products over the internet, of course it makes sense
to invest in an attractive website. If you plan to start a pig farm, of
course you should spend good money to buy good breeding
varieties. The point here is simple: don’t waste your precious
capital on things that are not VERY IMPORTANT to your business
in the beginning. Spend as if your new business would need to last
up to three years before it makes any good profits.
The lesson here is to start and run your business as a lean model.
A lot of uneccessary fat can negatively affect the health of your
small business. Avoid fat. If you already have some in your
business, make the hard decision and cut them off now. If not,
they'll cut you out of business soon!
#4 - Short Term Expectations
Entrepreneurs are usually excited to finally transform
their ideas into amazing businesses. This excitement
and optimism is often so high that we expect our new
business to be making a lot of money in a short time.
Why shouldn’t we think so? Our ideas are often
innovative and revolutionary. The demand is out there
and customers are expected to come in their
thousands. Some times, these plans work and an
overnight millionaire is made. Other times, the story is
different; things may not turn out the way we have
planned. (photo credit:
meditationsfromthehive)
Some businesses start to turn a profit in their first
week of operation. Many others don’t make any
money at all until a year or two afterwards.
Sometimes in life, things don’t always turn out the way we plan for
them to be. And because the future is uncertain, it only makes
sense that we prepare ourselves for the surprises that will most
likely come up.
I’m not a pessimist at all but I find that it often helps to assume
the worst case scenario when you’re starting a business. It’s
unfortunate that our get-rich-quick mentality does not allow us to
take a long term view of our business. When you take a long term
view, it is less likely that you will become frustrated when you
don’t see any profits in the first six months. With a long term
perspective, you are likely to spend wiser and not waste money on
those things that do not really matter in your business. A long term
perspective also allows you to prepare sufficient capital for your
long trip.
#5 - Not Paying Yourself A Salary
Starting and running your own business is such a powerful feeling.
It means you’re the boss; the biggest gorilla in your forest! You
don’t take instructions or orders from anyone and you can do as
you please. Unfortunately, this feeling makes many entrepreneurs
treat their businesses like an ATM; an automatic cash machine
that produces money for their private use and entertainment.
Many entrepreneurs make the fatal mistake of confusing their
business account as a private account. They’re totally different.
Your business should not DIRECTLY be paying for your
personal phone bills or children’s school fees. It is wise to pay
yourself a salary as the owner of the business and discipline
yourself to spend that salary within your means. If you continue
taking money out of your business to spend on private stuff
and things that do not contribute to the growth of your
business, you’re asking for trouble.
Get it straight; you may be the boss almighty of your small
business but your business is separate from your personal life.
If you want your business to survive and grow bigger, you will
have to respect its financial independence. If you want to be
able to take money out of the till, work harder. The harder you
work to grow your business, the more money your business
makes and, as a direct consequence, the salary you earn can be
higher. (photo credit: cnaonlinetrainingclasses.com)
A salary forces you to be disciplined. At the first signs of
success, some entrepreneurs take money out of their promising
businesses to fund a lavish lifestyle; a new home, a fancy car
and vacation trips abroad. All of a sudden, the business (which
was doing very well) starts to weaken and may probably die. If
there was a salary mentality in place, there may have been a
little more discipline and wise planning in spending the money.
Just to be clear, your salary as the business owner may or may
not be fixed. A good method is to pay yourself a portion of the
profits you make in a month (commission basis). I prefer the
commission basis because it motivates you more than a fixed
salary. If the business makes more profits, you earn a high salary
and vice-versa. This mentality is likely to keep you more focused
on growing your business rather than wait until the end of the
month to pay yourself a fixed salary (whether the business
performs well or not).
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To your financial success!