Understanding financial statements can go a long way in the empowerment drive for local entrepreneurs given that it is the language of doing business. It may seem like simple advice, but several small businesses make the same mistakes early on during the existence stages and survival stages of their lifecycle which come back to hurt them much later in their success and maturity stages. Out of all the roles that a small business-founding owner need to take on, managing finances and keeping accurate records seems to be the most daunting one.
This is partly so because due to the fact that the most critical part of starting and operating a successful business is premised on accurate forecasting. Making it through the tough and rough first years is easier when things like cash flow, expenses are forecasted, and contingency plans are afoot for insurance-related eventualities. Balance sheets and income statements are scary to many entrepreneurs despite the fact that it is through these that entrepreneurs are able to interpret the entire business performance.
It is clear that not only big financial disasters cause businesses to fail but also failure to manage business overheads and accompanying litany of succession of small, poor decisions that cripple business in the long run. I have highlighted five common mistakes that small businesses often commit as follows.
Firstly, not budgeting When it gets down to business finances, playing by the ear may not be the best strategy to pursue. Budgeting is so essential that not only does it take care of expenses but also ensures that a business is has enough cash to put away for recurring yet overlooked expenses such as taxes and insurance. It also goes a long way in helping a business to reduce wasteful expenditures and at the same time offering insight into where to cut costs.
Secondly, freestyling your cash flow Cash flow goes hand in glove with your budget. Several small businesses confuse cash flow with sales. Let me use the example of how you might have loads of orders for cakes, but until you get paid for those orders, you will need to cover all your expenses such as taxes, petrol and wages out of your own pocket. If cash does not come in quickly enough, soon you find yourself needing to take out a loan to keep your business afloat.
Thirdly, securing funding too late Borrowing money for a business is best done when you do not actually need it and you present a strong financial position to the lender that shows that you are well able to repay your debts. Contrary to the aforementioned, if a business is already skipping payments because it’s short on cash flow then convincing your bank to lend you money may be near impossible. In short, the rule of the thumb is do not spend money that you do not have.
Ideally a business could avoid borrowing money altogether by simply building its own safety net. Fourthly, not having an ‘in case of emergency’, abbreviated as ICE fund Ideally, your ‘in case of emergency’ (ICE) fund should consist of savings of at least twelve months’ worth of expenses. This type of fund could be kept in an easily accessed investment account that has high interest rates, and most importantly easily withdrawn at short notice. Since emergencies tend to occur in every business, it can only be prudent to prepare for it by making sure contingencies are in place.
Fifthly, not being money smart As a start-up, the owner of a business and the business entity itself tend to be inseparable thus, you ought to survive with the bare minimum resources. This means working from home or sharing an office. Driving your delivery van to the point where you absolutely need a new one. A good way to measure if it is worthy any expense at this stage is to ask if it adds to your bottom line or if it will generate revenue. In the case where the answer is “no”, then do not buy it.
Conclusion Nurturing a healthy bottom line and a positive cash flow are essential in operating a successful small business or any other business in that case. O’Brian M’Kali (PhD, MBA, MSc, M.Ed.), has lent his expertise to many organisations highlighting the essential role that enterprise development and SMMEs play in organisational and economic growth. Can be contacted on Mobile: 71860308 (WhatsApp). Email: [email protected]