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Basic financial survival strategies for MSMEs

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RESEARCH shows that almost 80% of all small businesses collapse within the first one and a half years of operation. While this “death rate” has become an accepted statistic by economists, the sad part is that most SMEs don’t “die of natural causes’’, but inadvertently commit “financial suicide”.

By Clive Mphambela

We are calling it “suicide” in this article because most small businesses owners actually kill their own businesses without knowing it or intending to do so.

It is quite common for entrepreneurs and small business owners who are new to business to quickly develop some bad financial habits and make harmful decisions that diminish the chances of success for their businesses, even in cases where the underlying business model is quite sound.

As responsible bankers who want to see the small business sector grow, it is our duty to advise the average SME owner on how to avoid the simple financial mistakes that will make a big difference between the long-term success and a quick and unpleasant sudden death of your business.

Not Keeping Basic Financial Records

One of the many reasons why most small businesses sometimes collapse is because the owners fail to keep basic business records.

Business records help the owner in assessing the health of the business, especially whether the business is making a profit or not.

Financial records are like the daily temperature readings of your business.

They provide important and invaluable information that acts as an early warning system that alerts you before something goes drastically wrong.

Most of the time, a business will not collapse without showing signs and symptoms first.

How else would you know as a manager of your business, that your costs are high and rising out of control if you do not keep regular records of monies you have spent? How do you tell that your goods are being stolen by your employees if you are not regularly taking stock?

How do you track increasing and falling demand trends if you are not keeping robust sales records?

True enough, basic recordkeeping may require additional diligence and effort on the part of the owner or manager of a business, but certainly it usually will not cost a lot of money to keep basic business records.

Basic records also do not require specialised accounting skills, but business common sense, the basic ability to read and write and the unwavering commitment and discipline of the business owner.
Why is recordkeeping important for banking relationships?

Records also are essential for your bankers and one of the most important business records is easily provided by the bank statements of a business.

It is therefore crucial for every business, no matter how small, to have some form of relationship with an appropriate bank.

It is advisable for anyone in business to always open and maintain a bank account.

Because it requires commitment and diligence, recordkeeping also tells a story about both the business owner and their business. Keeping records diligently demonstrates a level of seriousness and accountability by the business minder.

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 basic records? How can you know if you are making profits (or losses) if you do not write down or record your incomes and expenses?

Good records will help your bankers or other investors or creditors to assess your business for appropriate credit facilities.

What are the dangers of confusing revenue and cashflows with profits?

Every business owner must understand the difference between these three important terms.

Revenue (also known as sales or turnover) is the money that flows into your business from selling your products or providing your services to customers.

Profit, however, is the difference between money that flows into your business as sales revenue and money that flows out of your business as expenses.
Also not all money that comes into the business is revenue, some money simply represents cash flows into the business.

For example, the proceeds from a loan from a bank or an investment from a friend are not profits but an element of cash flow. As a business owner therefore, you should always be careful to separate these funds.

A business may have a huge amount of sales, but may be generating losses. Even though your shop may be overflowing with customers and the tills are full at the end of the day, the business may actually be bleeding and losing money.

So the trick is clearly understanding your costs in relation to your revenues.

Your costs should be less than your revenues for the business to be successful.

Cash flows are, however, important because cash helps one’s business to meet obligations in the short term when the business is still growing and may not be profitable.

SME owners sometimes make long-term decisions based on short-term successes.

If you have a sales boom in one month, it does not mean things will remain rosy. Get to understand the business cycle and don’t commit to big expenditures because the cash flow has been good for one season.

This failure to distinguish cash flows and revenues from profits often leads to another deadly sin.

What are the dangers of not paying oneself a regular salary?

One fundamental principle of business is that the business and the owner should be separate entities. While the owner controls and runs the business, it is often wise to think of the business as a separate entity from the owner(s).

The money that is in the business belongs to the business, of course, until a dividend is paid from the profits. Unfortunately, most small business owners do not like this distinction and treat themselves and their businesses as one and the same.

This makes many good entrepreneurs treat their businesses like an ATM that will produce money for their private use and entertainment at any time.

Danger lurks in running the business this way.

It makes it difficult to ascertain the true costs of the business and therefore the true profits being made. The way around this problem is for the business owner to be paid a salary, if they are involved in the day-to-day running of the business.

The salary must be commensurate with the size of the business, and the size of the work being put in by the owner-manager. Of course, if you own the business but have hired a manager to run it for you on a daily basis, do not pay yourself a salary, but rather wait for the dividend.

Do not therefore make the fatal mistake of confusing yourself and running the business account as a private account.

The business should not pay directly for your home telephone bills or the children’s school fees. Make sure the salary you draw each month as the owner of the business is spent within your means and do not burden the business with expenses that do not add value to the business and may therefore cause its demise.

l Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe.

BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on clive@baz.org.zw or on numbers 04-744686, 0772206913

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