A number of businesses were well conceived but on the long run, those ventures could no stand the test of time due to finance mistakes entrepreneurs make.
Growing any business require lots of zeal, energy and mastery. However, it is important that the right finance strategies are deployed to avoid the business being muscled and strangled financially.
In 1994, Tasty bakery was a very flourishing business that was well patronized but the business did not last 7years before it became liquidated. The company had made some financial mistakes which they think could be managed but could not as the company struggled until it finally bankrupted and shut down by the owners.
The company had gone to take a loan from a bank to finance some equipment to boost production but little did they know that, that singular decision would mar the business.
What are there finance pitfalls to avoid
DO NOT BORROW FUNDS YOU DO NOT NEED
Quite a number of business owners think borrowing to run a business is the best option available for such business to thrive. This is absolutely wrong. Every business needs funding but not all businesses need borrowing all the time except for expansion.
A lot of CEOs borrow to finance their personal luxury life while relying on the turnover of the business for repayment of such loan. No business survives that way because turnover does not equate profit.
Profit comes after you have deducted your cost of running such business vis a vis your recurrent and capital expenditure. Recurrent expenditures are the expenses incurred in buying materials, wages and daily cost of running your operations while capital expenditures are expenses on productive fixed assets.
While some entrepreneurs believed they have arrived due to high turnover from their businesses, it is rather not yet uhuru as every business has it high and low periods. You have high sales today doesn’t meant you will enjoy same tomorrow.
However, ensure you make conscientious efforts to increase sales and always endeavor to net your cost from your turnover before making any expense decision outside the business such that the business still pays for such decision.
More importantly, financial discipline is very important in every business. Stay within your financial plans and do not allow periodic sales boom affect your financial decision.
ONLY BORROW TO EXPAND AND NOT TO START A BUSINESS
Speaking from experience and financial ground, it is not always wise to borrow funds to start a business. Every business starts small and grow big. No matter how brilliant your business plan looks like, it just a mere piece of paper. Business proposal is a seed needed to move but not a factor to moving on to make a business thrive.
From point of knowledge, business ideas, in this part of the continent most atimes does not conform with reality due to some extraneous factors that greatly bothered on double taxation, prudential guidelines and stiff competition.
No matter how brilliant your idea is, there is someone somewhere already implementing such idea. Finding a target market for your product is such a big challenge you must fight to overcome. More reason it is much better to start small, carve a niche within a market and improve on the leverage before putting more resources such that if your product does not enjoy quantum patronage, you can retract and then restrategise.
Taking Nigeria financial industry as a case study, Nigeria commercial banks do not finance ideas or new businesses. Not that it is a taboo to do so but because of the unpredictability of the market space, it is difficult. No one builds something on nothing.
More importantly, the funds being given out as loans are depositors funds and not recouping such may be calamitous when loans are classified as bad. Banks profits are utilized to make provision for such bad loan and this erodes depositors funds and liquidity.
In the real sense, what do commercial banks look out for? They look out for pedigree. Have you done such business before? How well are you doing in the business? What has been your sales turnover? The truth is, everyone identifies with success but failure is certainly an orphan. When you start a business and you run it well, banks will come to your aide and help you expand but expecting that banks will finance your new business or your brilliant idea, that may not happen except things change with time.
Like I earlier reiterated, start small, grow big and expand. With this, investors will come to your aide and banks will also come calling.
DO NOT ISSUE DUD CHEQUE
Some entrepreneurs are chronic dud cheque issuer. This is not good enough for good business with prospect for future opportunities.
Dishonoured (dud) cheque act of 1977 clearly stipulated 2 years imprisonment for anyone who deliberately issues a dud cheque. Although, there are certain areas of law that may not criminalize issuance of did cheque most especially when a cheque is issued against undelivered goods and services.
Under such circumstance, the cheque can be stopped and if the payee goes ahead to present the cheque, it may not be adjudged to be a dud cheque if this can be proven beyond reasonable doubt that values did not exchange hands.
As a serious entrepreneur, it is better to avoid such scenario and ensure you do not issue cheque when indeed your account is not funded. It does not portray business integrity and good character.
It is good for you to also know that banks most of the times lend against character and not necessarily against collateral. There have been instances where banks do clean lending to some blue chip companies whose character, pedigree and business integrity has been tested and trusted over the years.
In as much as you can not measure up to the category of such blue chips, you can also start from somewhere because as a young entrepreneur, if your character can not be guaranteed, hardly can that happen when you grow big.
You must as a matter of fact avoid such pitfall if truly you are serious about growing big in the future.
MAINTAIN A GOOD ACCOUNTING BOOKS
Most of entrepreneurs run their businesses by impulse. Every financial decision must be well structured and intentionally designed. Any business that does not have a separate account department no matter how small may not do well. This is very important because all financial decisions must be well planned and documented.
As a financial person, I once met an entrepreneur who was by average standard doing well in business. He approached me for a loan years back. I first asked him how long he has been running the business? he said 2 years. I went further to ask him for his 1 year bank statement, audited account for the last financial year or 6 month management account?
The man was shocked. His response was “why do I need audited account when my business is self financed?”. “I started my business with my 5 years savings and I have grown it to this level without bank finance, so, why audited account”?.
What most people do not understand is that, every business is a going concern and how you keep your books will determine how far the business can grow or will grow. If you dont need the bank today, you may need the bank tomorrow. So, as an entrepreneur, keep an accounting book and ensure all your incomes and expenditures are recorded and all cost tickets are kept.
To grow big in business, you must learn to keep records and be accountable even when no one is watching you. That is the only way to attract banks and investors to support your business.
MONITOR YOUR EXPOSURES (LOANS)
I had a stint in the recovery world some years ago. It was indeed revealing and worth the experience as a debt collector so to say.
Most of the loans that I recovered were never designed to go bad. They went bad because of certain reasons ranging from: abuse of approval condition precedent to draw down on the loans, lack of monitoring, diversion of the funds from the purpose for which it is meant. The most interesting is the inability of the account officer to monitor the loans to ensure prompt repayment and right application of the funds.
On the flip side, the borrower also has an obligation to monitor the loans as well. This is the part that is really relevant to our topic.
Frankly speaking, most of the entrepreneurs do not monitor their loans. They take loans from banks and go to sleep. Monitoring of their loans should not be taken for granted. Most time, rates are changed either by system errors or by deliberate act and such is not discovered until later date.
Even when such is discovered, banks most of the times hardly want to reverse such variance most especially when income has been taken. Do not only monitor but ensure all rate changes are well documented and acknowledged such that when such variance is discovered, you can have documents to show to prove your case.
It is advisable that you employ a dedicated or part time accountant to review your loan account (s) at least quarterly or half yearly to avoid the stories that touches.
STICK TO YOUR ORIGINAL BUSINESS PLAN
This is one of the greatest mistakes entrepreneurs make. You can not be master of all else you will become master on none.
While it is good to have great business running, it is also good to have such business solidified and expanded. Revenue from the business should be utilized to create more capacity for increased output rather than investing in more business opportunities which you lack mastery. With time, you can expand and become a captain in the field.
Even though I may not completely advise against investing in more business opportunities, it is important one sticks to the original business plan which has worked over the years. Altering your business plan may affect the long term gains that may accrue to your business.