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 #5: Not knowing or controlling your costs and expens...

A short series, in very few words, that will save you big business headaches! Reason #5: Not knowing or controlling your costs and expenses - By Kevin Bresson MBA, M.Eng

In part 1 of this series, I made a joke that someone stupid enough to sell a $100 item for $80 should not be in business.  But what if a person thinks that an item costs $100 and sells it for $120 – when in fact, the correct cost of the item is $120 – should that person be in business!?!

This is what actually happens in the real world.  When entrepreneurs get so busy with maintaining and increasing their sales, they assume that they are making certain profits.  However, they completely ignore or do a poor job of checking their costs, and actually end up not making the profits they expected!

Reason #5: Not knowing or controlling your costs and expenses

Cause: Not making time or sticking to the discipline of doing this
How to avoid it: Understand how to capture & control costs & expenses in easy ways

A quick lesson based on my lazy accounting logic:
  • “Costs” is the common term for DIRECT COSTS, and can usually be associated directly to a specific product or service.  For example, if a retail clothing shop imports a dress, the cost to buy from the foreign source, the freight and the duty paid to bring the dress to the shop are all direct costs; associated directly to that dress.  Let’s pretend that this adds up to $25.
  • “Expenses” is the common term for INDIRECT COSTS, and are usually costs of running the business that cannot be associated directly to a product or service of the business.  Instead, these costs are shared so that a portion of it can be added to a product or service.  For example, the cost of rent for the clothing shop space, business tax, salaries, etc could add up to $1,000 each month, and if on average there are 200 pieces of clothing selling each month at the store, you may decide to divide these indirect costs between these selling pieces ($1,000 ÷ 200 = $5).  So, the correct total cost of the dress would in fact be $30 ($25+$5), and the owner should set the price to recover $30, rather than $25!  Indirect costs such as overheads are very often overlooked when calculating how much a product or service is going to cost!
While the above is how I wrap my head around it, a business owner should really make it a point to learn a bit about finances.  You can ask your book-keeper/accountant to coach you on the subject.  Alternatively, you should read books and follow YouTube videos on an introduction to small business accounting!
Let’s get down to the two steps of avoiding this reason for failure.

1. Capture costs and expenses correctly

In part 2 of this series, I made suggestions that some people may have laughed at – open a bank account, have receipts, receipts and always receipts.  If you actually did that, you would already be in excellent shape to capture all your costs and expenses.  Costs (aka. direct costs) are handled very differently based on the type of business, and I will not have time to cover this adequately in this article.

I would like to focus on capturing expenses (aka. indirect costs) correctly though, as this tends to be the most difficult type of one to get a handle on.  Firstly, each time you make a payment, place the receipt in one of the following envelopes representing the type of expense:
  • Indirect Salaries & Wages 
  • Building Rent & Equipment Hiring/Leasing
  • Repairs & Maintenance To Building/Equipment
  • Phone, Electricity, Water & Vehicle Fuel
  • Office, Administration & Advertising
  • Insurance Payments
  • Bank Loan Payments
  • Licenses & Permits
  • Other Payments
Secondly, by the end of each month these receipts should be recorded in a book or form with a column for each of the above types of expenses – this allows you to easily add up the column, and see how much you spent on salaries & wages, phone & electricity, etc for the month.  To meet the end of month deadline, make sure this is recorded at the end of each week; or better still, get a reliable person (wife? husband?) to do it for you.

See Tools & Forms section for a form that can be printed out and filled manually (bonus: Excel version that can be used on a computer).  I love this simple method because it allows someone to really learn some good fundamentals of proper accounting.

2. Control costs and expenses

If you know what amounts and where you are spending, it is really easy to control.  Controlling costs tend to involve renegotiating direct costs of a product or service (e.g. negotiate with the foreign source for lower dress costs).  Though you can do the same for some expenses, the real key to controlling these involves a strong discipline to spend on what is really, really necessary.

Some questions you may ask in doing this: Do you really need a secretary or can you do all your administration with some good apps on an iPad?  Do you need an expensive, latest iPhone (breaks easily) or will you get as much work benefit from a cheaper Blackberry (does not break as easily, and yes, I’m allowed to promote Canadian technology :) )?  Do you conserve energy and keep your electricity expenses as low as possible?

We all do this in our personal lives and it should not be too difficult to get motivated to do this in your business.

It amazes me how people that write about small businesses can make it sound so complicated.  I approached it very differently because your grass-roots, small African business just need the most basic of management frameworks to assist their drive and willpower, to avoid failure; especially in the early stages.  I drew from my experiences (and heartaches) and hope sharing this makes a positive contribution to the often tough and lonely quest of a small business owner.  I hope you found the short series useful and enjoyable, whether you are an entrepreneur or ‘wantrepreneur’.


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