The world, and particularly Africa, is turning to entrepreneurship especially now that the rate of unemployment is significantly rising on the continent.
This is evidenced by the sharp increase in startups seen in the last decade. However, there has also been a significant number of startups that have shut down during the same period.
Why are some businesses flourishing while others are declining? We analyze 10 common financial mistakes that entrepreneurs make, which could potentially cost them their businesses.
- Failing to create a detailed business plan
When starting a new business, crafting a comprehensive business plan is essential to guide you through each stage of establishing and managing your business. A good plan should include financial projections, goals, and strategies.
As such a shoddy business plan lacking these elements leaves entrepreneurs vulnerable to risks. For instance, without a detailed plan, one may not anticipate the costs or budget needed for the smooth operation of the business over time.
- Overestimating revenue
Budding entrepreneurs tend to be overly optimistic, often making high revenue projections not backed by market data. They may fail to account for market shocks, price hikes, and inflation. For instance, an entrepreneur might expect their business to become profitable within six months, whereas businesses typically take about 18 to 24 months to achieve profitability.
- Underestimating expenses
When starting a business venture, entrepreneurs need to budget for all possible expenses. This means budgeting for fixed costs like rent and salaries, variable costs like utilities and raw materials, and one-time expenses like equipment purchases. It is also important for entrepreneurs to track their expenses as the business progresses to avoid budget shortfalls.
- Using business funds for personal use
Mixing personal and business finances is also a common mistake that entrepreneurs make. This makes it difficult to track the business’s expenses, revenue, and profits or losses. Entrepreneurs should keep separate accounts and records for personal and business finances to maintain clear financial boundaries.
One should open a dedicated business bank account and use separate credit cards for business expenses. Apart from helping them keep track of their business and personal accounts, this separation simplifies tax reporting for entrepreneurs.
- Overspending on startup costs
Many entrepreneurs overspend on trendy office spaces or the latest technology to keep up with established competitors or to gain legitimacy and credibility. This overspending can leave them financially vulnerable. Entrepreneurs need to be fiscally responsible taking into account the fact that other expenses will inevitably arise as the business grows.
- Overlooking a contingency plan
Entrepreneurs should build a safety net to avoid shutdowns in case of market volatility and other financial disruptions that would affect the business. Entrepreneurs should therefore have an emergency fund that will provide them with financial security during downturns or crises.
- Failing to plan for taxes
When establishing their businesses, many entrepreneurs fail to consider or just choose to ignore their tax obligations. This is perhaps due to the cumbersome nature of tax preparation. However, ignoring these obligations can result in legal implications for the business entity.
Entrepreneurs ought to plan their taxes enabling them to understand their obligations and avoid unexpected liabilities. They can also consult professionals to ensure compliance and optimize tax strategies to minimize liabilities.
- Failing to monitor financial performance
As such it is important for entrepreneurs to regularly analyse their financial statements thereby identifying trends, strengths, and areas for improvement, and enabling better decision-making. However, some entrepreneurs overlook this step only to later realise that their business is in a hole after suffering losses.
- Falling into debt
Debt can be necessary for startup capital, but overborrowing without a clear financial strategy for repayment can lead to financial ruin. Entrepreneurs should monitor their finances and borrow carefully.
They should also ensure they secure loans with favourable terms and develop a viable repayment plan. Loans should only be taken when necessary and only if the business’s cash flow can sustain the debt.
- Not seeking professional advice
Consulting industry experts before setting up a business is crucial. Professional advice can help navigate complex financial decisions, optimize tax strategies, and plan for long-term growth.
Advisors bring expertise and an external perspective that can benefit the business, such as identifying market trends and determining pricing strategies.
