Many people have become self-employed and are running small businesses, either from home, business centres or town.
BY CLIVE MPHAMBELA
However, as we go into 2017, we need to be careful that the efforts and resources you have put into getting into businesses do not come to waste as a result of simple and avoidable mistakes.
Much research has shown that almost 80% of all small businesses collapse within the first one-and-a-half years of their operation.
This business “death rate” has become an accepted statistic by economists, and the sad part in all of it is that most small-and-medium enterprises (SMEs) do not “die of natural causes”, but inadvertently commit “financial suicide”.
We say “suicide” in this article because most small business owners actually kill their own businesses, although, without the actual knowledge or intent to do so.
It is common for entrepreneurs and small business owners, who are new to business, to quickly develop some very bad financial habits, which lead them to making harmful decisions that diminish the chances of success for their businesses.
This happens 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, how to avoid the simple financial mistakes that will make a big difference between the long-term success of your business or its quick and unpleasant sudden death.
Here are a few “deadly sins” that result in the demise of many small and medium sized businesses, but should be avoided in 2017.
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.
Records are particularly useful in determining 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 record keeping 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.
Record keeping important for establishing banking relationships
Records also are essential for your bankers and one of the most important business records is provided easily 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.
Business records show a measure of discipline
Keeping business records requires commitment and diligence. Regular record keeping 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.
The hidden dangers of confusing revenues, 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, proceeds from a loan from a bank or an investment from a friend are not profits but an element of cashflow.
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 profitable and successful.
Cashflows are, however, important because they help the business to meet obligations in the short-term when the business is still growing and may not be profitable.
SME owners also 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 do not 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.
The dangers of not paying oneself a regular salary
One fundamental principle of running a 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.
The money that is in the business belongs to the business, off 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 automated teller machines that will produce money for their private use and entertainment at any time. Mortal danger lurks in running your 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 lead to its untimely demise.
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 firstname.lastname@example.org or on numbers 04-744686, 0772206913