Poor financial management kills many business dreams

Primavara Picknick Snacks owners Jenifer and George Wambugu at the plant in Kariobangi , Nairobi, last week. DIANA NGILA 

By MURORI KIUNGA

In Summary

• The second mistake is expanding too much and too quickly before business gains ground. Rapid expansion and over expenditure are twin killers of most stable business. They put strain on the cash flow and compromise everything. No business can operate optimally without cash.

When I was contemplating quitting job to start a business, my mentor, a veteran who had been in business for more than three decades, told me what I still remember vividly.

“Do not be cheated,” he offered. “There is good money in business. You cannot go wrong in own business, but you can easily get wrong on money management and fail miserably.”

The old man was talking about cash flow management — the single most common cause of business failure. In fact, some experts estimate that up to 80 per cent of startups and small business failures are directly attributed to poor cash flow management, rather than a lack of profit, competition or other external factors.

A good number of small business owners spend much of their time worrying about where to get money to pay bills, chasing debtors and running cat and mouse game with creditors rather than work.

Regardless of how great your business model is, how profitable you are or how much money you have invested in your business, you cannot survive if you cannot manage your cash flow.

The most common cash flow problem comes from uncontrolled expenditure, overestimating future revenue and underestimating expenses. It is good to be optimist but blind optimism is dangerous.

To be on the safe side, it is advisable to make provision for a scenario where your projected revenue during a period shrinks to one third and expenses increases threefold. This will save you headache if revenue fails drastically.

Put strain on the cash flow

The second mistake is expanding too much and too quickly before business gains ground. Rapid expansion and over expenditure are twin killers of most stable business. They put strain on the cash flow and compromise everything. No business can operate optimally without cash.

Thirdly, avoid impulse buying. When in business, you can expect unsolicited sugar coated proposals from people interested in your money such as consultants, business advisors, individual sales people as well as service providers.

They will entice you with good products ranging from software, hardware, insurance services to marketing services, all with promise of making or saving you a lot of time and money.

Although such services are good and can actually give you leverage in the market, timing and quantity matters a lot as far as your cash flow is concerned.

Always keep an eye your budget and on the bottom line and avoid impulse buying. Do not be blinded by easy payment terms or promise of magic results. Exercise extra caution when taking a debt or writing order for non-stock items regardless of payment terms.

The fourth cause of cash flow problem is selling on credit, especially when dealing with big companies and government. It is common, especially for big companies to arm-twist small suppliers into signing up for long credit period.

Also collect receivables from big companies and government is not easy and my stifle your finances or force you to seek loans and overdrafts to technically finance their business. Most big players avoid cost of finance by deliberately delaying paying their small suppliers.

Finally, avoid operating with a zero balance or without a cushion of liquid cash on hand. Every business should have contingency cash for any eventuality that may arise. Opportunities or disaster may arise and work against you if you do not have liquid cash.

Living from hand to mouth when in business is like taking a nap on a precipice. Something small can tilt your business on the wrong side. It is crucial to always keep some emergency cash reserve that can last your few month or highly liquid assets such as shares, treasury bills or fixed deposit.

You can also have standing overdraft facility with your bank or several credit lines open such as sacco or active chamas (business clubs) where you can access fund within days.

Mr Kiunga is a business trainer and the author of ‘The 7 Pillars of Financial Success’.
Email: murorikiunga@yahoo.com.