Even as small businesses has a major impact in economic development, many of these businesses die as its early stages due to money mistakes by its owner.
According to Fundera,
20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business.
Small businesses have been the builder of many economies in the world and as they grow and expand, the economy also grows.
Nigeria’s economy is characterised by a very large number of small businesses and the unique feature of these businesses is that they can be easily established since their requirement in terms of capital, technology, management and utilities are not as demanding as it is in the case of larger enterprises.
5 Cheap Money Mistakes That Kills Small Businesses
If you’re a small business owner, the following will be of value to you and your business.
1. Not knowing the difference between you (as the owner) and your business
Businesses are treated as being separate from the owners and this is what we call, entity concept (i.e business related activities and owners related activities should be accounted for separately).
If you follow the entity concept, you’ll be able to differentiate between the actual business activity and your ownership involvement. It will be clear to you if your business has a good cash flow from your profitable operations or not
2. Withdrawing from the business
There’s a concept called ‘owners drawings’ in the accounting field which is one of the basic most important concepts needed for any business to grow and survive.
Drawings occurs when a small business owner withdraw from the business for his personal use and not for business use.
Owner’s draw is a routine occurrence in small business and the implication is simple; it kills because the withdrawals made do not qualify as business expenses.
Withdrawing from the business for personal use kills the business in that the business doesn’t grow nor expand.
3. Not understanding what profit really means
Profit can be seen in different lights but in general, profit is the reward for the risk taken by the entrepreneur in the business.
Simply, profit is the difference between selling price and cost price but many small business owners forget to scrutinise the cost they incur before arriving at profit.
For every sale you make for goods and services, there is cost incurred or money expended (expenses incurred) which could be for transportation, fuelling, etc) that must be taken into consideration.
Let’s do some quick mathematics here…
Assuming you bought 12 cartons of small batteries for N230.00 each and sold one to your customers at N300.00 each. Your profit on the carton of the batteries will be calculated as:
Profit = Selling Price – Cost Price
Selling price = N300.00 * 12 cartons = N3,600
Alot of business owners get their cost prices wrong, they simply follow
Cost price = N230.00 * 12 cartons = N2,760
And Profit N3,600 – N2,760 = 840 is not your profit.
The total costs of purchasing and selling the 12 cartons of small batteries must be noted to give you the exact profit made after sales of the 12 cartons.
Let’s say you spent N120.00 on transportation to purchase the 12 cartons of batteries and N5.00 Nylon bag each was given out to your customers to wrap the cartons when they came to buy (i.e the cost incurred is N120.00 plus N5.00 * 12 cartons).
PROFIT = Selling price – Cost price
Profit = [N300.00 * 12 cartons] – [N230.00 * 12 cartons]
Profit = [N3600] – [N2,760]
Here is where to compute the total cost incurred
Total Cost price = N2,760 + N120.00 + N60.00 = N2,940
So the real profit here is N3,600 – N2,940 = N660
As a entrepreneur/ business owner, you should know the meaning of profit and how to calculate profit as this will help you to know the real financial status of your business.
Other reasons to know how to calculate profit.
This brings us to the next mistake.
4. Not re-investing in the business
As much as withdrawing from the business for personal use or non-business related use which kills your business,
profit acquired should be re-invested in the business until the business stands and grow eventually without relying on additional funds thrown into the business.
Re-investing pays a long term dividend.
As a small business owner, you won’t be able to compete with the big guys. You need a strategy for your business growth and expansion.
The amount to reinvest in your business will vary based on a strategy you map out rather than a percentage. Don’t reinvest to the point where other aspect of your business will suffer; let it be based on your business needs so that there’s enough to cover all other expenses. Do not consume all profit made
5. Not keeping proper business records
I carried out a research on the impact of proper record keeping on performance of small businesses and I could see that proper record keeping by small business owners is one big challenge faced by their owners
Business record keeping is the process of recording all the financial transactions and events that occur in your business. It could be purchases, sales, earnings, receipts or payments made.
a very interesting fact is that small business owners can do their record keeping by themselves. Among other reasons, the following gives an insight into why it is necessary:
- It allows you to see whether your earnings are enough to cover your expenses or not.
- It helps to analyse how much profit you’re making and how much you’ve lost.
- If you’re interested in taking out a loan or some bank financing, your bank will require financial data from you that will prove to them your business is doing well.
- Importantly, you can keep track on your business performance and helps you in making all your financial decisions with a sense of direction and clarity.
The points above are so easy to overlook by small business owners and these are some of the reasons why small businesses fail to grow.
Owning a small business could be overwhelming and very exhausting due to the fact that you have to micro-manage almost every single task.
However, managing your finances effectively is one the key ways to sustain your start up.
Be sure to avoid each of the 5 cheap money Mistakes i’ve outlined above and get ready for success.
What other mistakes do do you think small business make and that was not listed above?