Why do some entrepreneurs succeed while others do not? As per Michael Gerber, an entrepreneur is an amalgamation of three roles or characters. The first is the technician i.e. someone with the requisite skills and expertise, the second is the visionary i.e. the person with the grand vision, and the third is the manager i.e. an individual who can manage the available resources efficiently and productively. People approach the concept of entrepreneurship in two ways.
Some are hereditary business owners and entrepreneurship runs in their family, while others are experts in their fields who want to turn their expertise into a business. It is very rare for a manager to get into entrepreneurship. For visionaries and technicians alike, the biggest challenge is the managerial role. In other words, managing resources is the biggest challenge for the majority of entrepreneurs. In fact, newer entrepreneurs often lose out their dreams to some common small business financial mistakes.
Decoding the Impact of Small Business Financial Mistakes
Small business financial mistakes deserve more significance than financial mistakes made by medium scale or even large scale firms. The reason for this is basically the fact that small businesses have a much thinner margin for error. While medium and large scale businesses may be able to absorb bad decisions and situations, the same cannot be said for smaller businesses. Smaller businesses, on the other hand, are always in peril of folding, which is why they need to be very sure of their operations.
There is no area where small businesses need to be at their best than their finances. While their margin of error, in general, is thin, it is particularly razor-edged when it comes to finances. Small businesses start with limited funding, most of which is allocated to critical resources for a small period of time. This means that making any common or, for that matter, uncommon small business financial mistakes will turn out to be fatal for them. What kind of small business financial mistakes are we talking about? Here are some answers.
Hiring Too Many or Too Poorly
Most small scale businesses start with big dreams and grand visions. Starting a new business also offers an emotional high to most people. These elements combine to result in one of the most common small business financial mistakes – hiring too many people. In the initial stages, the confidence is high and the hopes are through the roof. This results in projections and estimations being heavily biased in the favour of the business in question.
What is the direct impact of this? The business ends up hiring on the basis of expected work as opposed to current requirements. This creates an insidious company culture where an individual’s work is done by two people, which means that the salary expenditure is two times as much as should actually be required.
Not Projecting Cash Flows
Every business starts with a kitty i.e. the sum of money it can rely on. Most small businesses start with a business plan as well. Unfortunately, these business plans aren’t always created with functionality in mind. Instead, they’re created to make the business idea look good. The purpose of the business plan is to show the business owner the viability of his business. It is supposed to reveal the flaws in the idea, the challenges in the operations, and even the way the business will be run.
When the business plan is made to make the idea look good, all these little business truths are glossed over. More crucially, cash flow projections are skewed in these “for show” business plans. Not having genuine cash flow projections to guide the business is definitely up there on the list of small business financial mistakes that can turn into major losses for a small business.
Not Claiming Expenses and Paying Taxes
A business is an entity. It lives and breathes like a living organism. Unlike the commonly held belief, a business is always operational. The costs, when broken down, should be broken down in much more detail than they are. Typically, if you look at a business’s cash flow estimations and projections, you’ll find that it contains only repeating expenses. There will be a mention of miscellaneous expenses but what constitutes these expenses is vague.
Larger corporations also have this header on their balance sheets. More poignantly, their “miscellaneous expenses” are expanded upon in a separate company document. Larger corporations leave nothing to chance. In contrast, smaller organisations rarely ever define what will go under miscellaneous expenses. Even more telling is the fact that smaller business owners don’t claim smaller expenses.
Surveys show that about one-fifth of the small businesses surveyed don’t claim more than 50 percent of their expenses. Furthermore, a fourth of the total businesses surveyed stated that they choose to ignore any expense less than $5. Most business owners do this because they feel it’s too small and that they shouldn’t load their business’s expenses too much. In a way, it’s their way of helping their businesses.
Choosing to ignore it because it is too small is laziness. Choosing to ignore it because you feel you’re helping your business save is a misconception. If your business has more profits at the end of the financial year, it just means that you’ll be paying the taxman more. Any business expenses you save via ignoring these little expenditures will quickly add up and result in you shelling out more in taxes.
Choosing Top Line Vanity Instead Of Bottom Line Pragmatism
When you look at a company’s balance sheet, there are two rows that are the most important – the top line and the bottom line. The top line shows the total turnover or revenue of the business in question while the bottom line shows the profits. The top line looks very impressive especially when you show the balance sheet to banks or venture capitalists.
The bottom line, however, is the true measure of how well a business is doing. Many businesses don’t focus on the bottom line so long as it is in the positive. Instead, they focus on the top line because it is more prestigious. This is a form of vanity that is particularly being fuelled by the on-going rise of the concept of valuation over value addition.
On the ground, what this means is that businesses are focusing on their valuation (this revolves around total revenue) as opposed to value addition wherein the business looks to add value to its customers. Choosing top line vanity over bottom-line pragmatism is one of those small business financial mistakes that are rooted in emotions.
Neglecting Cash Reserves or Financial Buffer
One very simple but often ignored truth about business is: “there will be lean times”. It is impossible for a business to expect that it will start at the crest of the wave and then ride that wave into infinity without ever experiencing the trough. Any entrepreneur who is claiming this is deluding not only himself but also everyone around him including his staff.
It is easy for a business to jump on the currently hot bandwagon and utilise the trends to grow. The real challenge comes when the trends change. However, how a business navigates those lean periods defines whether it stays afloat or sinks below the surface. One of the ways of navigating those turbulent waters is by preparing for them in advance.
In fact, the best way is to prepare for those times when the business is in the best of health. This is where cash reserves or financial buffer comes in. Not having this buffer almost always leads to trouble for the business. The cash reserve should be in place from day one. Moreover, it should grow as the business grows. If the business does very well then the cash reserves should mimic that performance.
When the lean period rolls in, the business is supposed to use this cash buffer to tide over any shortfall. More importantly, when the lean period has passed on, the business should work doubly hard to restore the depleted buffers. Not doing any of these things can be safely counted as one of those small business financial mistakes that business owners rue in hindsight.