There are top 10 reasons why most small businesses fail: inadequate business planning, insufficient capital, lack of management experience, poor location, poor inventory and cash flow management, over-investment of fixed assets, poor credit arrangements, personal use of business funds, competition or lack of market knowledge, and low sales, or not pricing properly.
This is according to ‘Small Capital’, a practical guide for small business published by Standard Bank, with the permission of Microsoft South Africa and MWEB Business.
“I think many small business owners, especially blacks, don’t really have the right knowledge to run a business. We need to be educated, mostly around the issue of money,” said Precious Shuping, the owner of Mrs Clean, a South African small business that trains women and places them in homes to work as domestic workers.
Money is a very sensitive issue and it is recommendable that business owners arm themselves with a near-perfect knowledge that can help them to manage it effectively.
An entrepreneur can turn a profit but still goes bankrupt if his or her business has a cash flow problem, the practical guide said, warning that poor cash flow is one of the major causes of failure in small businesses.
“Developing a cash flow forecast will indicate the estimated money flowing into and out of the business over a period of time, allowing you to set budgets and targets, and monitor performance.”
Mzwandile Jele, a fruits and vegetables entrepreneur, said: “It’s true. I experienced this issue of mixing your personal money with business money when I started this business three years ago.
“It gave me serious problems, and put me in and out of business. Because I was determined to soldier on, I decided to enroll for a short course in bookkeeping, where I learned a lot about managing inventories and cash flows.”
The ‘Small Capital’ brochure recommends the following intelligent tips to control cash flow effectively:
• Keep operating costs down:
Every cent counts. If you have a 20% mark-up, then every rand of fixed costs spent unnecessarily means five additional sales are needed to get back to the same point. It is easier to save costs than to grow profit, so don’t buy new if you can do with second-hand, and don’t buy at all if you don’t really need it.
• Avoid credit terms:
Bad debts are the quickest way to sink a small business. Make sure your payment terms are understood and agreed to in writing before a project begins or a sale is made.
• Debt collection:
Follow up as soon as money is due. A new debt is far easier than an old one.
• Improve supplier payment terms:
Negotiate preferential payment terms, extensions of credit lines or discounts for early settlements. However, don’t compromise your relationships with your suppliers – you need them on your side.
• Keep stock to a minimum:
Stock costs money to buy, transport and store. It can also be stolen, damaged or become obsolete. Managing stock sensibly is as important as managing cash flow.
Shuping said: “I’m 40 year-old and have been running this business [Mrs Clean] since 2004 and only formalised it in 2010, but I’m not sure if I’m well-equipped in terms of running a business.
“We need strong platforms to get education about managing our business effectively, maybe the Global Entrepreneur Week is one of them,” she added.
“We are not growing our business because we lack technology, besides my dream of having my own training
institute that will formally train domestic workers.”
Photo credit: ATS Accounting