7 Ways To Not Flush Your Money (Down The Toilet)
As entrepreneurs we are encouraged to make mistakes, to fail over and over. Poor financial management is one such mistake that is ever so often made by startup, medium and even large companies. There are several pitfalls we need to avoid.
1. More work does not necessary mean more staff.
We often anticipate that additional staff will be required if we receive contracts, so the natural urge is to increase staffing, but obtaining contracts is not putting money in the bank until we have actually received payments. Therefore, make plans to increase human resource prior to getting the contract if necessary. Do not get carried away don’t hire until the money is real. Have current staffs multitask and place them in areas where they can be more productive, before adding more staff.
2. Borrowing for non-revenue generating reasons.
Banks are in the business to lend money and collect interest which can add huge burdens to your business. Do not borrow to repay credits or service loans unless it is refinancing and the rates are lower. Borrow only what you can afford to repay and what will be used to generate revenue.
3. Not paying taxes on time.
This is a huge mistake that most, if not all businesses make. When we pay taxes late we incur penalties and interests that must be paid, this is money that could be used elsewhere. When we take on staff it is our responsibility to deduct taxes from their salaries and pay over to the government and when we charge general consumption tax (GCT) we are also liable to pay over the GCT to the government. Companies act as agencies for the government. The problem now is that the taxes from employees and the GCT collected are all lodged to the same bank account, where operational expenses are paid from, and this may lead to the government’s money being used up. The solution is to maintain two separate accounts. One for the taxes collected and the other for operational expenses. Another solution is to use an outsource accounting firm that will give the liability its due attention.
Businesses in their infant stage tend to lower their prices to differentiate their offerings. Some manufacturing companies have little knowledge of costing, and so end up losing, because the cost of production is higher than the final output. Hire a cost accountant to price the product correctly, spend time to develop your product or service so that you can command higher prices. If you price low at the start and then increase as you grow you will lose your early customers. Build and protect your brand by pricing at a decent margin and maintain and build customers.
5. Accounts receivable.
Offering credit to customers is bad for business because it ties up your cash flow which could be used to pay bills or salaries. You are not a bank. Giving credit is not your business, more often businesses fail because they cannot collect receivable and manage cash. Offer credit only when you can afford to do so and in most cases businesses rarely can accommodate that. If you do offer credit have repayment conditions in place such as reward for early repayment.
6. One major customer.
Ever heard the saying “Don’t put all your eggs in one basket” that is exactly what one major customer is... it’s a disaster. You should look at your revenue as if it was a portfolio. You shouldn’t have all or a majority of your income coming from one or a few sources. Build alternative sources of revenue so that if your major revenue streams get cut off the business can continue.
7. Budgeting, overheads investing in too much assets.
Running a business or even your personal life blind folded is dangerous. Spending and not keeping track of your expenses can lead to bankruptcy or business closure. Avoid investing in too much assets all at once. Do monthly, yearly or even weekly budgeting. Look at what you are spending, align them with your revenue and make comparison with prior periods, cut unnecessary costs as they are identified. Financial management system enables you to accomplish important big picture and daily financial objectives. A good financial management system helps you become a better business owner and individual as you are able to make better financial decisions. |P|