Why small African businesses fail, and how to avoid it
A short series, in very few words, that will save you big business headaches! Reason #2: Mixing personal cash with business cash - By Ke...
http://www.beach2bigcity.com/2014/05/why-small-african-businesses-fail-and_18.html
A short series, in very few words, that will save you big business headaches! Reason #2: Mixing personal cash with business cash - By Kevin Bresson MBA, M.Eng
We all know someone like this: they start a small business and six months later they are driving impressive, new vehicles and spending in the best restaurants and bars! I can accept that confusing between “profit” and “cash-flow” (last week’s article) could be due to an innocent misunderstanding. However, pretending that the money from your business is yours is simply careless, stupid and dangerous!
If you read the business success stories of most honest millionaires or billionaires, they made incredible sacrifices and had strong sense of discipline. This article is about one area of self-discipline that is worth focusing on.
Reason #2: Mixing personal cash with business cash
Cause: Poor cash-flow planning & self-discipline
How to avoid it: Change your habits – handle money the same way you would expect your employees to handle the company’s money!
Do the following to change your habits:
1. Open a bank account
This is so obvious: open a bank account for your business, and use it! If you have 3 businesses, open 3 accounts! Your pocket or purse does not tell you when and how much money you receive or you spend – a bank statement will. You’re a busy person and a simple bank account is the cheapest book-keeper you’ll be able to afford – it will keep track of the flows of business money.
You just need to make sure that you deposit your receipts immediately and you plan your cash-flow regularly to avoid overdrafts, or lack of funds, as this can quickly become costly (yes, banks all around the world LOVE charging businesses for surprises).
Having a bank account is also a good way to start a relationship with the bank, as you may need loans in the future.
2. Pay yourself a salary
This is less obvious but the owner(s) need to have the business pay them a salary like any other employee. This will likely to be very tough in the early stages of a business, but it is the ultimate way to really avoid mixing business money with your personal money – your salary is yours to spend freely.
See last week’s cash-flow example (online blog only) for how to plan for this, where I even showed an example where there wasn’t enough cash to pay the owner's salary in February. In this case, the business had to borrow money from a bank to make up this cash shortfall for that particular month. This is significantly more responsible than having the owner(s) borrowing from the business, because they are not getting a pre-planned salary!
Under this same rule, wives or husbands should not be allowed to borrow any amount of cash from the business “for groceries”, and kids visiting the shop should not get pocket money from the business’ till “for ice-cream”!
3. Receipts, receipts, receipts
Simple: EVERY payment you make or get needs to be exchanged for a receipt. ALWAYS walk with your own carbon-copy receipt book because many businesses you deal with may not supply receipts.
You need a receipt:
a) To confirm that you did pay for something and avoid future disputes and
b) To have a record of this payment
Store your bank statements and receipts carefully as these will be 80% of what a book-keeper needs to prepare formal accounts for your business, and assist with nice things that most business owners don’t enjoy; such as paying for taxes and preparing to apply for a bank loan.
If you follow the above, you will likely not have the instant lavish lifestyle that false business prophets want you to aspire to. However, you stand a better chance of still owning your business 1, 2, 3 or more years after starting.
The best motivation to follow the above is if, or when, you start employing people, you will be leading by example. We all know managing employees is complicated, and the last thing you need is them learning bad money habits from you!