Five financial errors made by entrepreneurs

Many small business owners stumble when trying to make sense of their rands. Here is how you can make the right decisions about money.

finances
By Guy Rich

Running your own business is not an easy task. Entrepreneurs have to worry about everything from the operations and administration to the financial health of the business.

 

For you as an entrepreneur dealing with customers may be easy, landing that deal may be a breeze and ensuring you have a good quality product could be simple. But when it comes to figures, numbers and making the right financial decisions, trying to make sense of the rands and cents is not everybody’s strength.


Here are five financial mistakes (and one “pasela”) made by entrepreneurs that you need to avoid:

 

My business is growing, I have lots of orders so I can spend, spend, spend

No matter what business you are in, it is cyclical. It goes up and down – some months will be good, some months will be bad. Never make the mistake of thinking that the good times will last forever – make sure you have enough cash reserves to carry you through the time when business takes a slump. A good rule-of-thumb is usually two or three times your monthly fixed costs.

 

Cash flow? What’s that?

All business whether large or small needs to find a balance between the money that is owed to them (creditors – people who give you stuff on account), the money that they owe (debtors – people who you give stuff to on account) and the money they have in the bank that you can draw immediately. People that owe you money must pay quickly so that you have more money in the bank. You need to ensure that you also have enough money in the bank to pay your operating costs and your suppliers. If you don’t, you have a cash flow problem which could result in your suppliers forcing you to pay them and you losing your business – refer to the point above – making provision for the bad times.

 

Nice-to-have and need-to-have

I have R700 000 in the business to buy a new bakkie which I need for deliveries. Do I buy a new Ford Ranger Double Cab 4×4 for R650 000 or do I buy a Ford Ranger Single Cab, with canopy, for R350 000? It would be nice to have the 4×4 for my “image” but a single cab, with canopy, is more practical. Learn to distinguish between the “need-to-have” versus the “nice-to-have” and invest the remaining amounts or spend it on other business-related “need-to-haves”. Remember it is about the business, not about you. Eventually you will be able to have that 4×4.


Know what you have, what you owe and how much you will have left

Keeping your finger on the pulse of the financial health of your business is vital. So many entrepreneurs leave this to bookkeepers and, before they know, they are bankrupt and have no money left. A simple question to your bookkeeper at the end of the month should keep you informed – how much money came in, how much money went out and how much do I have left. Asking the right questions and getting the right answers will help you develop your financial understanding of your business.

 

Appoint the right bookkeeper/accountant

Good financial management and reporting is an investment not a liability. Investing in and developing a relationship with your bookkeeper/accountant is vital. They can advise you on various aspects of the financial health of your business. So many entrepreneurs use “friends” or “a friend of a friend” for their bookkeeping and accounting needs. Why? Because they are cheap and affordable. Don’t fall into that trap. Do your research, use an accredited bookkeeper/accountant, learn from them and be prepared to pay. You are ultimately responsible for your business and its financial well-being, not your bookkeeper/accountant – although they are an important cog in the wheel.

 

The “pasela” tip

Learn to read, interpret and analyse bank statements – your bank statement is a summary of all financial transactions in your business. Use this information to your advantage. Not only does it keep you informed but it can also highlight possible financial weaknesses in your business.

 

Lastly, don’t be scared of financial management and accounting. The more questions you ask, the more knowledge you gain, the more knowledge you gain, the greater your understanding, the greater your understanding the better you start to run your business.

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About the Author

Guy Rich is a Fetola mentor based in the Eastern Cape. He has an extensive background in national and international business management. He is an accredited professional consultant with experience in industrial development, project management, investment and trade promotion, and public relations.

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