One of the main reasons companies fail is a lack of financial controls. If you want to be successful, you need to understand the cash flow of your business.
Coming up with a great idea and launching a business is fun. What isn’t quite as fun, though, is putting the systems and processes in place that are needed to make sure that your new venture survives. But even though these things might not be as inspiring as other aspects of launching a business, they are nevertheless crucial.
“A lot of young businesses fail because they do not have the necessary financial controls,” says Dr Alex Antonides of Enterprises University of Pretoria.
“It is very important to understand the cash flow of your business if you want it to survive.”
So what are the crucial things you need to understand when launching a business?
1. Understand your turnover
“When we look at a business, we actually don’t focus on turnover very much as a metric for success,” says Antonides.
“The fact of the matter is, turnover doesn’t tell you very much about the state of a business. It all depends on the industry you’re operating in. Even a very small mine, for example, can boast a turnover of R20 million a month. But is it successful?
Related: How to better manage your money in your business
“I had a student a while ago who was in the construction industry. His turnover was very decent, but he wasn’t making a profit. When I started questioning him about it, it became clear that he was purchasing his building supplies from a retail store, so he was paying R2,10 for a brick. Once we found a place where he could buy supplies at wholesale prices, he was suddenly only paying 90 cents a brick, which meant he was now making a solid profit.”
Success is not just about bringing money in, but also about cutting costs. A good turnover isn’t worth much if your profit margins are tiny.
2. Keep an eye on your cash flow
“You should always be aware of the financial situation of your business,” says Antonides.
“Your cash flow situation isn’t something you should check monthly. You should always know what it looks like. In fact, it’s a good idea to have a financial ‘meeting’ with yourself every single morning.”
Of course, many entrepreneurs avoid formal financial controls because they find them too intimidating. Instead they focus on the things they understand and enjoy in the business. This is a recipe for disaster.
“You have to educate yourself. Accounting doesn’t need to be hard — you just need to understand the basics. The truth is, the software that’s available nowadays does most of the work, and I would also recommend getting yourself an accountant, but you still need to understand the language. If your accountant explains something to you, you need to understand what he or she is saying. So financial literacy is very important,” says Antonides.
3. Get your affairs in order
There are some expenses that can (and should) be avoided, and then there are those that are worth every cent. As mentioned above, it’s worth investing in good accounting software.
Related: Are you in control of your business or does your business control you?
There’s no need to employ one full-time if you’ve just launched, but you can pay someone to have an occasional look at your books to make sure everything is on track.
Antonides also suggests investing in a good lawyer. “Many new companies run into trouble because of shoddy contracts. So even though it might be expensive, I would recommend getting a lawyer to look over your contracts. These include contracts with co-founders, employees, suppliers and clients.”
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