Lack of financial literacy
The number one financial mistake I’ve come across is a lack of financial literacy. Financial literacy is a key skill in running a business and often is the difference between success and failure. Financial literacy helps you understand the implications of decisions and the differences between assets (things that bring you money) and liabilities (things that take money away from you). I could write for days about financial literacy and why it is important and how exactly it helps a business succeed. This reminds me of a person who used to fly abroad to buy designer clothing to re sell in Zimbabwe. The person made great money from sales but never included the cost of flying in their business expenses and as a result wasn’t making as much profit as they thought they were.
Finances tell a story and we often see financial projections that while well-meaning have no basis or substantiation. Projections that assume customers will double every month but fail to explain why or how this will be achieved. There is a concept of “cost of customers”, that is the average amount spent to get a new customer. This includes average advertising spend per new customer as well as things such as free trials or discounts. So if you spent $100 on advertising and got 2 customers whom you gave a $5 discount each, your average cost of customer would be $55. Customers have a cost and assuming that they will just come leads to great disappointment if not failure.
Poor record keeping
One of my favorites quotes are the words of Peter Drucker; “If you can’t measure it, you can’t improve it”. This is paramount in business finances. Yet we see such poor record keeping in small businesses time and time again. Knowing what’s coming in, what’s going out and how it’s going in or out gives you a picture of how your business should grow. Also knowing where to correct if things are not adding up, is always useful. Many people say they aren’t good with numbers and the idea of record keeping sends them deep into their repressed horrific memories of high school accounting and mathematics. With the advent of technology, the smartphone and applications it is so much easier to keep track of financial records. Applications range from simple expense trackers to complete admin and record solutions.
Lack of separation of business and person
Many businesses start as very small concerns with a sole proprietor responsible for financing the business. Much like a child there comes a time when the business must stand on its own. I sat down to do the books of a small business owner once and he wanted to claim expenses for paying laborers he had engaged on once off basis. Not only had the amounts been paid in cash but the cash had been drawn from his personal bank account rather than being placed into the business account and drawn from it. This meant that the expenditure couldn’t be substantiated much to his dismay. This goes together with record keeping, keep your business and yourself separate as much as possible to allow you to truly see the performance of the business.
Lack of reinvestment
My cousin ran a bar in Shamva in 2006/7. As a new bar in a place that previously didn’t have one, his business found success very quickly. So after a few profitable months he made the decision to go and buy a big screen TV, complete with a huge surround system and DSTv. Good idea right? It would’ve been had he placed these things in the bar to entertain his customers but instead he placed them in his house. Another bar opened up with big screen TVs and Tsungi’s bar didn’t survive the next 3 months. Reinvesting the profits into your business gives the business a better chance of success. I know, easier said than done in this economy. Through reinvestment your business will improve the very thing that brought you money and this will in turn bring you more money.
Lack of preparation
One of the most important concepts in financial literacy is understanding working capital and how it impacts a business’ ability to meet its customers’ needs. The phenomenon of bootstrapping businesses on a shoe string budget has made many believe that working capital is a luxury but nothing could be further from the truth. Businesses take time to gain traction and go through a teething phase. Going in with the expectation that your baby will be profitable from the first month is certainly confident but not prudent. Do you have a plan to meet your operating expenses while you wait for self-sufficiency? Know your recurring expenditures; things such as web domain & hosting, office & shop space and internet service. How much would you need for 3 months? 6 months? Have a plan in place to meet these expenses while your business finds its feet.
Not using an expert
Yes, you need to understand your businesses finances but you also need the help of a financial expert to manage your business. Your financial literacy will help you understand the advice from the expert. While we’re on this point someone saying they’re an expert doesn’t make them an expert, you should look for a financial expert who understands your industry and things that are important to know in your industry especially around rules and regulations. What you want is someone who is not only qualified but experienced with your business model. And yes, they are not cheap but I consider the collapse of a business to be more expensive.
Lack of systems – financial controls
While the importance of systems can be looked at from many views it is as much a financial issue as it is a management issue. Businesses need strong systems in place in order to succeed. Systems are important in helping you coordinate your financial activities. Keeping you up to date on who owes you, who you owe and when these amounts are due is an example of one place where a system can be applied. If a customer pays you late or you pay the internet bill late your business can be adversely affected. A good system will regularly check your receivables and payables and let you know what’s pending so you’re not caught unaware.
That’s my take on top financial mistakes that kill small businesses in Zimbabwe. Do you relate to any of these? Are there any I left out? Let us know in the comments sections.
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