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A new enterprise needs prudent financial practices to achieve its set objectives, Josephine Ogundeji writes
Launching a business can be a thrilling experience but it also entails financial uncertainties and obstacles.
While entrepreneurs often focus on creating innovative products, exceptional services, and captivating marketing plans, it is critical to give equal importance to the financial aspect of the enterprise.
This is because neglecting financial management can result in considerable financial pitfalls that may hinder business growth and compromise personal finances.
Therefore, it is imperative to be vigilant and mindful of the financial implications of every business decision to mitigate potential risks and ensure long-term success.
There are many financial pitfalls that businesses can fall into, but one of the most common is overspending. This can happen in a variety of ways, from investing too much money in a product that doesn’t sell, to overestimating revenue projections and overspending on salaries or bonuses.
Overspending:
For instance, you own a small retail store that specialises in selling luxury handbags, business has been good, and you have just received a big shipment of new bags from a designer; the problem is that you have invested too much money in this shipment and overestimated how quickly you would be able to sell them.
As a result, the bags sit on the shelves for much longer than you anticipated, tying up valuable cash flow and preventing you from investing in other areas of your business. To make matters worse, you have already paid for the shipment upfront, so you cannot get that money back until the bags are sold.
To try and boost sales, you decide to offer a discount on the bags, but even with the discount, they still are not selling as quickly as you need them to. Then, you realise that you have overspent on this shipment, and now struggling to pay other bills and expenses.
To avoid this type of financial pitfall, it is important to closely monitor your expenses and revenue projections and to be conservative when making investments in your business.
In addition, it is also helpful to have a contingency plan in place in case things do not go as planned; this could include having a cash reserve to cover unexpected expenses or having a clear plan for how you will cut costs if necessary.
To prevent falling into these traps, it is crucial to have an understanding of the prevalent financial errors committed by entrepreneurs; here are some of the key financial pitfalls to avoid in business:
Not having a solid financial plan: One of the biggest mistakes business owners make is not having a well thought out financial plan. This plan should include a budget, cash flow projections, and revenue forecasts. Without a financial plan, it’s easy to overspend, overcommit, and not have enough funds to sustain the business.
Failing to keep accurate financial records: This can lead to incorrect tax filings, missed payments, and even fraud. Keeping accurate records is crucial to understanding the financial health of your business, and it can help you make better decisions about where to allocate resources.
Overestimating revenue: Business owners can be overly optimistic about revenue projections, leading to over-commitment and overspending. It’s important to be realistic about revenue projections, based on market research and historical data, and to always have a buffer in case of unexpected expenses or downturns.
Underestimating expenses: Similarly, it is easy to underestimate expenses, especially in the early stages of a business. It is important to budget for all expenses, including taxes, insurance, and unexpected costs. Always have a contingency plan in case of unexpected expenses, such as a line of credit or emergency fund.
Neglecting cash flow: Cash flow is critical to the survival of a business, yet it is often overlooked. It’s important to monitor cash flow regularly and to have a plan in place to address any shortfalls. This may include adjusting expenses, seeking additional funding, or increasing revenue.
Mixing personal and business finances: Finally, one of the biggest financial pitfalls is mixing personal and business finances. This can lead to tax issues, legal liabilities, and confusion about the financial health of the business. It is important to keep separate accounts for personal and business finances and to avoid using business funds for personal expenses.
Starting a business is an exhilarating experience, but it is also fraught with potential financial pitfalls. By avoiding these common mistakes and having a solid financial plan in place, business owners can increase their chances of success and long-term viability.
In an exclusive interview with The Punch, the Chief Executive Officer of David Mollani Footwear, David Atolagbe, says he has been a victim of bad financial decisions as he was not taking proper records.
He says, “From experience, I was guilty of all these because I was not taking proper records of sales, cash inflow, and outflow, and at the end of the day I would not be able to account for the money being expended, except the money coming into the business account. Also, I did not take stock of the inventory by knowing what the business had and what the business needed.
“That was poor inventory management because as a business owner, you should because there must be proper records of what is bought, and what you have left before buying, after buying what is the total, and after selling what is remaining.”
Speaking to our correspondent, an accountant, Leke Olushuyi, says that one mistake to avoid is the absence of a solid budget.
He says, “Before embarking on any saving plan, or at least while gathering funds to facilitate a business decision, businesses should know how much they want to save, and how the money will be spent.
“Resources are scarce and many times, after withdrawing their savings, businesses spend their savings on items/projects that aren’t the best for their business in terms of profitability. This is because they did not plan (budget) how their funds will be spent. So, when they receive this fund, they spend it on anything that comes their way in that period.
“Another mistake businesses make is poor or zero business research before spending their savings. Let’s say a trader saves money to start selling a new kind of product. They sometimes forget to make inquiries about the price, the profit that can be made, alternative product options, and if their intended supplier is giving them the best price, among others. Some businesses skip this research part and say ‘this is what is selling in the market,’ and they jump into it and eventually regret it.”
Olushuyi advises that small businesses that cannot afford to consult professionally, should build relationships and connections with people who have done what they are about to do, or closely observe their successful counterparts to avoid making mistakes with their business savings.
An Auditor at Ernst and Young, Oluwafemi Ososan, notes that not having a clear understanding of why a business owner is pursuing a business endeavor can lead to failure.
He says, “It’s often said that if your business isn’t addressing a problem or fulfilling a need of the people, it may not be worth pursuing. Therefore, not understanding the purpose behind your business venture could be a hindrance.
“In addition, not highlighting the target market, when you know your target market, you tailor your cost and revenue to what is obtainable in that environment. For instance, if I am to start a school in Mile 12, I won’t be thinking of charging a school fee as high as N300, 0000 because of the environment.”
According to him, merely saving money in a bank account may not be sufficient, as there are alternative options such as fixed deposits, treasury bills, and bonds that offered higher interest rates.
He adds, “Choosing not to take risks can be a hindrance when it comes to starting a business, as entrepreneurship inherently involves taking risks. If one is afraid of taking risks, one may miss out on valuable opportunities.
“Also, having a business plan helps you avoid following the crowd, as it provides a clear goal for you to pursue, which keeps you focused on your objectives. This way, you can stay on track and not get swayed by popular trends or the opinions of others.”
Collaborating on the above, a tax practitioner, Habeeb Olaosebikan, says that many people struggle with indecisiveness when it comes to starting a business.
He adds, “The second major obstacle that individuals face when starting a business is financial indiscipline. Even if they have a clear idea of what they want to do, they may struggle to manage their finances effectively. It can be tempting to use the money saved for business purposes to meet personal needs, but this can quickly lead to demotivation and a sense of defeat.
“To overcome this obstacle, individuals must learn to be disciplined with their finances and make a commitment to using their savings only for business purposes. This may require setting up a separate bank account or seeking the assistance of a financial advisor.”
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