(Sundiata Post) — Among the myriad challenges faced by budding entrepreneurs and small businesses are five cardinal financial mistakes. These mistakes partly explain the statistics that nearly 80 percent of small businesses that start today may fail within the first 18 months. Poor financial management is one of the biggest internal reasons for business failure. Here are some them.
Not Keeping Adequate 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 warning signs and symptoms.
Accurate financial records help you know when your costs are high and rsuccess in any business (big or small) and financial are proofs of this. Keeping accurate and upto-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 hasising out of control, it also tracks the flow of inventory.
Accountability is a basic ingredient of 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.
Confusing Revenue With Profits: It’s 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).
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 ohigh 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.
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. 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 surContinued from page 18 vive a little longer. Yes, 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. Yet it is important to know where to draw the line.ut a bank loan with a