Common financial mistakes that kill small businesses (2)

Among the myriad challenges faced by budding entrepreneurs and small businesses are five cardinal financial mistakes.

These mistakes partly explain the statistics that nearly 80 percent of small businesses that start today may fail within the first 18 months. Poor financial management is one of the biggest internal reasons for business failure. Here are others. This was inspired by an article on smallstarter.com

Short term expectations

Entrepreneurs are usually excited to finally transform their ideas into amazing businesses. This excitement and optimism is often so high that we expect our new business to be making a lot of money in a short time.

Why shouldn’t we think so? Our ideas are often innovative and revolutionary. The demand is out there and customers are expected to come in their thousands.

Sometimes, these plans work and an overnight millionaire is made. Other times, the story is different; things may not turn out the way we have planned.

Some businesses start to turn a profit in their first week of operation. Many others don’t make any money at all until a year or two afterwards. Sometimes in life, things don’t always turn out the way we plan for them to be.

And because the future is uncertain, it only makes sense that we prepare ourselves for the surprises that will most likely come up.

Without been pessimists we find that it often helps to assume the worst case scenario when you’re starting a business. It’s unfortunate that the prevalent get-rich-quick mentality does not allow us to take a long term view of our business.

When you take a long term view, it is less likely that you will become frustrated when you don’t see any profits in the first six months.

With a long term perspective, you are likely to spend wiser and not waste money on those things that do not really matter in your business. A long term perspective also allows you to prepare sufficient capital for your long trip.

Not paying yourself a salary

Starting and running your own business is such a powerful feeling. It means you’re the boss; the biggest gorilla in your forest! You don’t take instructions or orders from anyone and you can do as you please.

Unfortunately, this feeling makes many entrepreneurs treat their businesses like an Automated Teller Machine (ATM); an automatic cash machine that produces money for their private use and entertainment.

Many entrepreneurs make the fatal mistake of confusing their business account to a private account. They’re totally different.

Your business should not directly be paying for your personal phone bills or children’s school fees. It is wise to pay yourself a salary as the owner of the business and discipline yourself to spend that salary within your means.

If you continue taking money out of your business to spend on private stuff and things that do not contribute to the growth of your business, you’re asking for trouble.

Get it straight; you may be the boss almighty of your small business but your business is separate from your personal life. If you want your business to survive and grow bigger, you will have to respect its financial independence.

If you want to be able to take money out of the till, work harder. The harder you work to grow your business, the more money your business makes and, as a direct consequence, the salary you earn can be higher. A salary forces you to be disciplined.

At the first signs of success, some entrepreneurs take money out of their promising businesses to fund a lavish lifestyle; a new home, a fancy car and vacation trips abroad. All of a sudden, the business (which was doing very well) starts to weaken and may probably die.

If there was a salary mentality in place, there may have been a little more discipline and wise planning in spending the money. Just to be clear, your salary as the business owner may or may not be fixed.

A good method is to pay yourself a portion of the profits you make in a month (commission basis). Commission basis motivates you more than a fixed salary.

If the business makes more profits, you earn a high salary and vice-versa. This mentality is likely to keep you more focused on growing your business rather than wait until the end of the month to pay yourself a fixed salary (whether the business performs well or not).

STEPHEN ONYEKWELU