Money mistakes that kill promising business ventures

A man hawks his wares along Temple Road in Nyeri town.  [Kibata Kihu, Standard]

The success or failure of businesses hugely depends on decisions made by managers, stakeholders or any other managing authority. Here are some personal finance mistakes that are responsible for the collapse of promising business ventures. 

1. Failure to separate business and personal accounts

Business people are always advised to ignore the call of convenience and commit to creating separate savings, current and credit card accounts for business before they can begin serving their customers.

This is usually for two reasons:

a. Doing this right at the beginning makes it much easier to do the accounting for one’s business, plan for tax estimates and budget for unpredictable months.

b. Having separate bank and credit accounts allows for a more accurate picture of one’s business’ financial health by preventing an overlap between what one personally earns and spends, and what the business is generating and costing on a monthly basis. Personal expenses will always bite into business reserves, in essence decimating the business, as they often take precedence.

2.  Failure to plan for tax obligations

Duggan Kimani, the co-founder of Presta, says they learnt the importance of filing tax returns the hard way.

“A mistake we made was thinking all the money we made belonged to us until the Kenya Revenue Authority came knocking. Find out what you owe KRA and file your returns,” he advises.

With a business comes new tax obligations. And when the stipulated time comes, what’s owed to the government must be paid. Don’t let your tax bill accrue. The piling of unpaid taxes, plus interest and penalties on the same, are the reason most businesses end up collapsing or battling endless court cases that needlessly eat into the businesses’ reserves.

Making sure you pay taxes in good time to save your business’ reputation and life.

3. Overenthusiastic spending for business

Even if pumping resources into a new business is an absolute win for the entrepreneur and amounts to creating customer confidence, businesses that overdo it end up risking collapse.

This is because they spend on avenues that are not profit making, or in assets whose contribution to the profit margins is negligible.

Expenses such as luxurious parties, team-building trips, and frivolous electronics that aren’t essential to the growth of a company offer very little value to your bottom line.

It is advisable to go for effectiveness over flashiness, and to survive on a bare minimum before the business can reach a self-sustaining level where benefits can be ploughed back to finance purchases of luxurious assets that serve the business.

4. Accruing too much debt

Living off the credit card is referred to by many experts as the worst financial mistake a businessperson can make.

Because credit cards are so convenient to use, many new business owners fail to see that they’re compounding their expenses and incurring interest charges every time they use the card and fail to pay off the full balance each month. It’s advisable to use a debit card instead. Living on credit finally catches up with, and nibbles on, businesses, eventually killing them.

Slow, controlled spending, which means that a business barely tries to spend outside its means, is the panacea to avoiding creditor ambushes.

5. Failure to save for lean times

The highs and lows of business mean that a rise in business activity today does not guarantee the same the following day. Take for example the current crisis businesses are facing: the coronavirus pandemic. Businesses are struggling to survive and only those that have emergency savings will have an easier time recovering.

Most financial planners advise entrepreneurs to keep at least three months’ worth of expenses in an emergency or contingency fund for their business and personal expenses.

6. Failure to set a clear budget and systems

A carefully planned budget keeps you disciplined. The budget should cater for operational, marketing and other expenses. Having a clear budget increases financial discipline and clarifies the roadmap to business growth.

Without a budget, a firm’s resources are likely to be grossly mismanaged. Without a budget, there’s lack of a defined mode of operation. A business cannot run well because there’s no set target to be reached.

“When I started my first business, I did not have structures and systems. I was printing out invoice books as needed. I lost a lot of money to theft as a result of that,” revealed Susan Kaitanny, the CEO of Posh Palace.

The enthusiasm to embark on running a business sometimes blinds people from setting goals and a roadmap towards achieving them.

Momentary success also fools people and they divert from a budget without considering crafting a new one.

7. Frivolous personal spending

When a business does well and resources are aplenty, business people may, unwisely, use the returns for their personal expenditure. When profits are not ploughed back into the business and are instead used to finance other lavish, unprofitable ventures, the business may stagnate or even collapse. Businesses require discipline that involves personal sacrifice even when resources seem to be in plenty.

And even if you’ve separated your personal and business accounts, scenarios often emerge that force you to dip into your personal funds to finance a business need, such as an expansion into a new niche or a marketing campaign that promises to deliver a high return for the company. It should be from private fund to business fund, and not vice versa.

“If you’ve rushed out and purchased a car, home or incurred another large personal expense and your business has something unexpected come up that means you won’t be able to pay yourself next month, you can’t be strapped down with an exorbitant amount of personal expenses. Be as lean as possible in both your business and personal life while growing your new company,” says a financial expert.

8. Accruing huge, unnecessary overheads

You don’t need that internet bandwith you’ve susbscribed to, so slow down on it. There’s a boardroom you pay rent for but do not need, let go of it. You have three people who perform the task of two, so cut one off. By all means, stay within your spending limits.

A lot of overheads cost the business unnecessary cash.

Even if you feel you have an obligation to keep people in employment or that your business needs to have some facilities to project a certain class, if it is impacting negatively on the business’ financials, drop it.

9. Ignoring insurance

Unforeseen situations are not to be ruled out. Insurance provides a cushion and helps businesses recover in case of unexpected circumstances that have the potential to floor them.

Many people choose to go without insurance to save their money. But this isn’t a wise financial decision. Insurance protects you, the business owner, in the event that you or one of your employees gets into a major accident at the workplace, or if you have to deal with a serious health issue.

10. Lack of accurate, clean and clear bookkeeping

Records of transactions in a business control its direction. If accurate, clean and clear, these records help business people understand where finances have been misappropriated to help in recovering of losses.

Bookkeeping provides for presenting relevant, timely and informative financial data, and provides for internal controls.