Despite the vital role of small businesses in economic development, many of these businesses fail to grow due to some major money mistakes made by owners.
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 characterized 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.
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. You’ll be able to see if your business has good cash flow from its profitable operations or not.
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.
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 scrutinize 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, fueling, 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
Cost price is where many business owners get it wrong, they simply follow
Cost price = N230.00 * 12 cartons = N2,760
And Profit N3,600 – N2,760 = 840 is not your profit.
The costs or expenses you incur when getting and selling the 12 cartons of small batteries must be considered to give you the exact profit made after selling 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 small business owner, you need to know what profit really means and how to calculate it as this will help you to know the real financial position of your business.
Other reasons to know how to calculate profit
This brings us to the next mistake
Not re-investing in the business
Just like withdrawing from the business for personal use which kills your business, profit made should be re-invested in the business until the business stands and grow eventually without relying on additional capital 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!
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.
One interesting thing is that small business owners can do their record keeping on their own. 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 determine how much exactly 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.
- Most especially, you can track your business performance and arms 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.