Finance is the language of business. We asked Precious Mvulane, a CA(SA) and founder and MD of GAD Consulting Services, and author of The Essential Finance Handbook for Business Owners, to highlight some of the fundamental errors that start-ups make and why they should be avoided at all costs.
1. Not knowing how much revenue the business has to generate
Find out what amount of revenue the business needs to bring in every day, and how many sales need to be made to achieve that daily target.
2. Not costing products or services correctly
To be able to plan, control and make decisions, all businesses need to determine a cost per unit on output, or service costs. These costs will differ from business to business, depending on what the business produces and the services it renders.
Costing is a financial management activity that happens at three levels:
- Business level: The focus is on the entire organisation, after direct costs and income statements have been consolidated.
- Functional level: Costs are determined within the department or division, and are normal, allocated operational costs.
- Product, service or project level: These costs are estimated with a specific focus on the product produced or the service rendered.
The selling price for each product or service is calculated based on cost price plus mark-up percentage.
A start-up needs to determine what the average mark-up is in its industry to establish the correct price. Be prepared to do a fair amount of research.
3. Not understanding what the obligations are in terms of financial compliance
As a financial advisor, I deal with many clients who come for help, not because they want to know what is going on in their business and how the various taxes work ie. employment, credit, how the consumer and companies acts impact them, but simply because they want to hand those responsibilities over to someone else without having to learn about them.
All these issues may seem overwhelming, but once you make an effort to understand the legislation, you will have a far better grasp on the business as a whole.
4. Not accounting for expenditure
Keep your slips! If you ask a financial consultant to do your tax returns, but you have no documentation, there will be nothing for the accountant to account for.
If you use the car for business, keep a plastic packet in your car and every time you fill up with petrol or pay for a service or new tyres, put the receipt in the bag, and then drop it off with your accountant once a month.
Remember that thermal paper fades, so don’t hold onto them for too long. The fact is you have to be able to account for all your expenditure, not only for SARS, but for the business.
How will you know how the business is performing if you have no idea what expenses you incur and how much?
Under-capitalisation is bad for business. Every business needs a certain set of tools to generate revenue, from computers to industrial equipment.
You cannot start a business without having a clear understanding of the cost of the equipment and how you will pay for it.
Perhaps it is possible to rent rather than buy very expensive equipment. The nature of each of these assets will determine the type of finance you require.
Without in-depth knowledge about that, you will find yourself knocking on the wrong doors and dealing with one rejection after another.
6. Not designing financial controls and systems
Financial controls are fundamental to managing risk and building a business that does not depend on you making decisions.
Good internal controls will help you meet business goals, achieve operational efficiencies and effectiveness, comply with laws and regulations, safeguard your assets against waste, fraud and misuse, and provide you with reliable data.
As a business owner, every control you put in place should be informed by the downside of not managing that particular risk.
The Essential Finance Handbook for Business Owners is available online and from good bookstores for R200.
Original article from Entrepreneur Magazine