These are some of the worst financial mistakes you can make in your business

These are some of the worst financial mistakes you can make in your business

These are some of the worst financial mistakes you can make in your businessAre you guilty of ‘putting passion before profit,’ or not separating your business and personal expenses? If so, you are not the only one.

We have rounded up some financial experts and thought leaders to give some of the biggest and common financial mistakes they continue to see South African entrepreneurs make.

They are: Precious Mvulane, GAD Consulting Services managing director and author of The Essential Finance Handbook;  Tiisetso Maloma, author of The Anxious Entrepreneur and the founder of Startup Picnic; Ethel Nyembe, head of Small Enterprise at Standard Bank, Elize Giese, head of Investments at FNB Business and Gerrie van Biljon, executive director at Business Partners Limited.

Here is what they have to say about the financial decisions entrepreneurs should not be making.

  • Neglecting your financial records 

“Financial information is a handy tool to understand where the business is and whether it is actually making a profit. Too often the information is prepared much too late and by then the business may already be in trouble. Business owners should have at least the basic information available on a very regular basis. It is important to note that financial statements are not only prepared to comply with the Income Tax Act or to apply for funding, they are a management tool available to the business owner to assist them to understand the financial position of their business.” – Gerrie van Biljon

  • Combining business and personal expenses

“When starting a business, the temptation is to pay for your business’ expenses using your personal current account. This blurs the lines of what you are spending in your business and the larger expense burden leads to a business owner worsening their personal financial credit records or placing it in jeopardy. Pay yourself a salary into your personal current account and use this for your personal living expenses.”  Ethel Nyembe 

  • Failure to plan 

“Failure to plan for the worst scenario. There will be times when your expectation of the costs of goods is actually below the real cost. This can have disastrous consequences on your cash flow if you have not appropriately planned for these circumstances. In addition, the likelihood of funds needed in the event of an emergency (like customers falling late with payments and a simultaneous salary run becoming due) is also high. Keeping an adequate and liquid reserve slush fund will allow you to quickly recover from such bumps in your operating cycle.”  Ethel Nyembe

“Not budgeting for sustainability and growth and for likelihood of uncertainties.”  Tiisetso Maloma

  • Putting passion before profit

“Entrepreneurs forget that business success is measured by the financial success of the business not by the passion. Passion will help you wake up in the morning and sleep well at night because you are doing what you love. But it will not pay the bills.

“You need to figure out a way of converting your passion to profit. If you don’t it just a matter of time before your business shuts down. Accept also that not everything you are passionate about can be a profitable business, especially in this economic environment.”  Precious Mvulane

  • Not watching costs 

“There are costs which can be bundled and reduced as time goes by. The trick is to always look for ways to save money by looking for cheaper alternatives, or even bundling expenses and going to suppliers to negotiate a discount with the new consolidated bundle.”  Tiisetso Maloma

“​Failing to create a savings culture – SMEs should educate and encourage their staff to be mindful of costs at all times. For example, this can start with simple interventions such as using a projector during meetings instead of printing paper all the time.” – Elize Giese

  • Spending unnecessarily

“Funding events and sponsorships – instead of going all out to fund sponsorship activities or events, SMEs should approach other like-minded businesses for collaboration. This would enable them to share the costs, while still making sure that the business reaches its objectives.”  Elize Giese

  • Over committing the business

“To acquire an additional, more modern machine may be tempting and in many cases can be motivated and justified however in uncertain times, this may stretch the business too far. The financing arrangement might put pressure on the business cash reserves and with a few low-sales months, the business may find itself in trouble.” – Gerrie van Biljon

  • Dependence on one contract

“Creating a dependency on one big contract. Gaining a big contract can be a huge win for a small business, especially when considering the additional injection of revenues into the business. But over time, these revenues may falsely be seen as stable and consistent and are often committed toward routine expenses. If you have not adequately diversified your revenue streams, the loss of a single, large contract can have serious consequences on your cash flow. Therefore it is always best to find multiple contracts over time (even if they are of smaller amounts) so that when major revenue streams crash or slow down, the business still has the opportunity to show growth.”  Ethel Nyembe

  • Ignoring the market

“Offering a product or service that doesn’t make money. This is the market providing feedback. Having no customers willing to buy what you provide means there is no business for you.” – Precious Mvulane

  • Borrowing from friends and family

“Often, the first place we go to borrow funds for a new venture is friends and family. But this is typically done through an informal payment arrangement or sometimes the terms of the repayment are not discussed at all. The best way to work around this is to formalise an agreement and payment arrangement to prevent vague terms and clarify expected payment arrangements. It may seem like an unnecessary step, but a formal contract prevents issues down the line.”   Ethel Nyembe

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Lebohang Thulo
Lebohang Thulo
Lebohang Thulo is the editor of SME South Africa. She enjoys keeping up with the country’s exciting and fast developing entrepreneurship ecosystem. You can find her at @lelele3