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A CFO on the biggest money mistakes that tank businesses

By Winnie Makena | May 25th 2021

Money, like emotions, is something you must control in order to have a balanced life. You have heard that less than half of all businesses close before the five-year mark, but have you ever wondered why? It can be pointed to many of them making obvious, fundamental mistakes and not surprisingly, many of these are financial.

Enterprise spoke to Steve Gichuru, Group Head of Finance at Octagon Africa Financial Services Ltd. He shares five common financial management mistakes small business owners make, and how to avoid these errors.

1. Lacking a business model

No matter how small a business is, a business plan is a must-do. Business leader John Maxwell had a core philosophy that “everything rises and falls on leadership”. How well you lead determines how successful and effective your business will become. Without a business strategy or plan, you get bogged down in day-to-day problems and forget the bigger picture.

Have a clear strategy on how your business works. This will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

Even that grocery store in your neighbourhood, you can pinpoint which one is well-organised. All businesses have growth areas, competitors, cashflow and profit. This is what is converted into a business plan and communicated to everyone involved.

A typical business plan includes a review of your current performance against previous year’s targets. This should be followed by an analysis of your opportunities and threats. Analyse your successes and failures during the previous year, look at your key objectives for the coming year and change or re-establish your longer-term planning. You can then identify and refine the resource implications of your review and build a budget. Define the new financial year’s profit-and-loss and balance-sheet targets then conclude the plan. You are to review the plan regularly, like on a monthly basis.

2. Not understanding the business cycle

Expanding, especially with startups, is a minefield. There is always the initial excitement, with little understanding of the business cycle. You may get excited about the early fruits, but every company has a business cycle.

Rapid expansion can be in terms of physical locations or over-employing. The common issues that arise are outgrowing your premises in a short time, shortage of cash to meet expansion costs, a drop in the quality of product and operating reactively rather than proactively.

We know companies in the country that were aggressive in expansion only to be out of business in a few months. Similarly, there are good case studies like the open-air restaurant in the Langata suburb that has been operational since 1980. Despite being widely successful, the owners have focused on their service and their expanding remains measured.

This is not to say you stay stagnant. Grow because of success but not because you feel the need to overcome problems like strong competition. If profits are rising and stable, capitalise on your success. Expand into other locations, and employ more staff to cater for increased demand. But if you expand too quickly you risk your business becoming unsustainable.

3. Not consulting professionals

Everyone with a brilliant idea for a startup assumes two things; that they are the only ones thinking it and that their idea is bound to change the world. The mistake they then make is assuming they have monopoly on executing the idea now that they have it. However, no one knows everything about everything. You need to consult. Learn from prior businesses and get advice from specialists.

Family businesses always hope to keep it in the family. But not getting external help is what kills these businesses so fast. A consultant may have a higher level of business expertise than the average employee and can provide unique solutions for businesses.

4. Lack of a business budget

You can only grow as much as your budget. Early next month, Kenya will have the budget reading, a very important government task. If a serious entity like the government takes budgeting seriously, then at whatever level you have to create, monitor and manage a budget. It is as simple as working out what you are likely to earn and spend in the budget period.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, further emphasising the need for one. Once you know your income and expenditure, you can work out how much money you’re making. You are able to look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to put out any potential fires. Make time to budget, use historical data, for example the previous year’s figures, and involve relevant professionals.

Most companies fail because they lack a budget. If you don’t know where you are going, any road will get you there. Say you earn a million in a month and decide to buy more stock than the previous month just because the money is there. When it is time to pay for utilities, you may find yourself short. Budgeting encourages you to avoid reckless spending.

5. Ignoring your taxes

A famous quote from Benjamin Franklin says “nothing can be said to be certain except death and taxes”. People think they can avoid paying taxes or save the work for later. Not declaring or under-declaring exposes you to a lot of financial problems. With iTax and Kenya Revenue Authority (KRA) pin, everything is interlinked and you cannot really get away without paying.

Look at the taxman as a partner in business. The same way you coordinate with suppliers is how you should remit that money.

Evading taxes has serious long term repercussions like run-ins with the law and penalties. Other than paying the principle plus hefty penalties, you hurt your credibility, which will likely pull your business down faster than you can imagine. The portal for tax payments are pretty simple to understand. KRA also has free trainings that are done monthly on how to manage taxation, for those who need the help.

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