Last week, we switched things up at The Red Notebook. After laying a foundation on habits, goals and lessons on the philosophy of personal growth and learning, we are now sharing specific themes every other week that directly address areas in our business and personal lives that we wish we could have done better. This week, we’re continuing with business finance.
Sponsor shoutout: our series on finance is sponsored by Eversend, an ebanking and money transfer app that’s disrupting the African banking industry. Use Eversend to quickly send money across Africa. Get Eversend from the Apple Store and Android App Store.
This week, I’d love to share with you some lessons I’ve learnt during the past 17 years of entrepreneurship. I started my first business in 2003 and very shortly after that, started a second business with a close friend. Since then, I’ve started businesses, projects, ideas, etc., from Elemental Edge – a multimedia production house that pioneered cutting edge VFX in Uganda to Node Six, which over the years, provided web hosting for thousands of clients and developed websites for hundreds more clients, large and small. My current baby is Fundi Bots – a nonprofit creating tools and increased access for better science education.
The lessons below are my lessons, which means that some entrepreneurs out there might disagree with a few of them, because they chose to do things differently. Also, the ability to implement some of these lessons will depend on where you are with your business finances and revenue streams, but no matter the stage you’re at, there are some financial disciplines and principles that should be religiously followed from day one.
Personal Finances vs Business Finances
1. Pay Yourself
It’s very, very easy to keep pouring all your savings, cash and time into your business. After all, you started this venture because you believed in the impact it could have and the profits that it could bring to take care of you and your family. But many of us entrepreneurs fall into the trap of prioritizing everything and everyone else except ourselves. This means that by the time we get round to paying ourselves, there’s nothing left. Your salary should be a priority item, along with the salaries of your team(s). Just like everyone else on your team, you have bills, living expenses, family and health to take care of.
Additionally, not paying yourself – especially if you don’t have any other major source of income – can lead to disillusionment, frustration and mental, financial and physical exhaustion that can take years to recover from.
2. Separate Your Personal Finances From Your Business Finances
During the very early stages of any business, it can be really difficult to differentiate where your personal finances start and where your business finances end. This is especially true if you’re at the stage where you’re paying for business bills out of your own pocket and if you don’t have an accountant to keep track of cash inflows and outflows.
Create this distinction as soon as possible. I’d recommend you open a separate bank account/mobile money account for your business and keenly track every shilling you send from your own account to the business account (and vice-versa). That first stage of separation will allow you to keep a close eye on how much you’ve invested and to ensure you don’t take out more than you put into the business (unless they are clearly defined profits).
3. Take Care of Your Health
If there’s one thing we entrepreneurs sacrifice the most, it’s our health. And not paying attention to your physical and mental health can become very costly later on as you grow older. Learn to prioritize your health from day one. Take time off from work, be intentional about building a work-life balance, rest when you need to and build a support system around you, either through friends/peers or family.
Managing Growth
4. Work on Growing Your Business
The antithesis to paying yourself is that you must continuously set aside money for growing your business. All business ideas thrive on growth: the more you invest in the business, the more the business grows and the higher your chances of creating a successful business and making a profit. Always make sure you’re planning two to five years ahead and looking for opportunities in which you can expand your products, services and your audience to increase your revenues and profits.
5. Grow Your Products & Services Carefully
Growth can be exciting as you move from new region to region, or increase your client base or – the best part – watch your revenues and profits keep increasing month to month. But too much growth can be dangerous, especially if you’ve not built the support foundation needed to manage a large number of clients. Your systems need to be robust to ensure that you can have the same quality of service/product from region to region. Your team needs to be highly capable of managing themselves independently, since you cannot be everywhere at once, your technical systems and customer support infrastructure need to be able to handle the increased demand for your own product/services and finally your own leadership and management skills will need to change over time, with a lot more delegation and oversight going one. Growing too fast can destroy businesses, even if you are actually making more money.
6. Grow Your Expenses Carefully
As you grow, expenses – fueled by actual need and excitement – can spiral quickly out of control. As your projections keep growing higher and higher, the expenses follow the same trajectory. But when it comes to expenses, learn to grow from your current limitations, not from your future projections. I now practice the principle of expanding only when the current resources are severely stretched. One of my biggest regrets was moving into an office that was bigger, and fancier, but far too expensive for us. We moved into it because I anticipated increased business from a few ideas we were testing and we needed to expand our team to prepare for the upcoming business. The projections did not come to pass and the expenses grew out of control until we were deep in debt and had to shut down, even though we had a few good clients.
Watch your bottom line, very very carefully and try to make the gap between your income and expenses as wide as possible. In that magical gap, lies the profit you’re seeking and the fuel to build your business empire.
Managing Projects & Activities
7. Outsourcing Can Save You Money
This one is a tough one, and making a decision for one over the other will depend heavily on your need and the volume of anticipated work. Generally, outsource when the work is periodic and in small volumes. For example, most Human Resource and finance work can be outsourced for small businesses. If you need an accountant to come in once a week to reconcile your books, or you need hiring services once every three months, then it doesn’t make sense to hire someone full-time to sit in an office while using only 10% of their time. It’s a very costly endeavour as it means you’ll have to cater for full salary and benefits for that person. Additionally, some short-term projects may require specific skillsets that you don’t have internally – like report-writing or design work – and outsourcing can help you fill that gap in the short-term.
8. Outsourcing Can Cost You Money
On the other hand, the effectiveness of outsourcing is highly dependent on the professionalism of the person/company you’re outsourcing to. Because most firms/people that do outsourced work have a large number of clients, they may not be as fully present or available for your work, and you could end up with low-quality work or unfinished work due to time constraints. Additionally, they may not always be able to show up for meetings with the client, which could affect the business relationship if the client is unhappy and you’re unable to meet their need. My advice would be to get the most professional and qualified company/person to outsource to, even if it’s not the cheapest option.
9. Scope Creep Will Cost You Money
Scope creep is when a projects requirements and deliverables keep changing over the lifecycle of the project, especially when the client is unable to make up their mind about something or offer concrete, final feedback. It also happens when there are too many project managers, or an approval process that goes through numerous individuals on the client side. One small output/deliverable can become a five or ten with a messy back-and-forth process to get feedback or approval. Because of this, the amount of work involved can increase significantly, costing you your time, money and sanity. I still have one really bad project that cost us financially and almost cost me a good friend because the client’s scope creep was really bad, and I wasn’t able to rein it in early and frequently.
Cashflow Management
10. Understand Your Cashflow
Cashflow is the lifeline of your business. It’s the money going in and out of your business. Positive cashflow is when your income is higher than your expenses and negative cashflow is when your expenses exceed your income. Negative cashflow is never a good thing unless it’s planned for, like large initial expenses that are going to be covered by a future payment or short interruptions like a delayed payment on an invoice. It’s it’s unplanned, its a sign that your company or business is in trouble. If your cashflow is negative too often and you’re pulling money from elsewhere to cover this shortfall, this is a huge red flag that needs to be addressed immediately by doing things like reducing expenses, increasing sales or getting an investment or debt financing option.
11. Monitor Your Books Carefully and Consistently
Many small business owners leave the finance stuff to the accountant, and simply wait for reports or problems before they begin reactively studying to look for the problem. In the early stages, every business owner should monitor and review their books consistently, at the very least once a week, at the most, daily. When you have a dedicated finance person who fully oversees your finance department, then maybe a once-a-month review of your books can suffice, but I’d still recommend consistent reviews and discussions with your finance lead. Money problems can come out of nowhere, like an unplanned series of expenses that you didn’t authorize, or payments that looked small in the beginning, but keep growing over time. The only way to find anomalies is if you’re paying very careful attention.
12. Be Ruthless With Your Expenses
Luxury and comfort have very little place in any business – even if your business is about luxury and comfort. Your expenses must be the smallest figure possible, and often, this means paying attention to small details, like whether to take an expensive cab/special hire or cheaper public transportation. Whether to invest in a fancy office with expensive furniture or buying the furniture and the space that gets the job done. Choosing to hold business meetings at a restaurant or having a simple office meeting.
Now, don’t get me wrong, some expenses can actually help you build more business, but you need to be objective and un-emotional about the reality of the cost vs. the reward. Often, it’s the small things that we don’t pay attention to that end up spiraling out of control and affecting our cashflow.
Debt Management / Financing
13. Understand Good Debt and Bad Debt
While it’s advisable to avoid debt as much as possible, some debt is good debt, if it’s helping you finance a production cycle based or an order, or helping you to expand your product offering in a new (guaranteed) market. For debt financing, get the lowest interest rates possible and ensure you have a concrete and actionable plan for paying off that debt. Bank loans are an example of a fine line between good debt and bad debt. A bank loan with good rates that looks great on paper can quickly spiral into financial ruin if your plans go south, so tread carefully. Only go into debt when a) you’re confident (and realistic) about your ability to pay it back and b) the rates are friendly. Avoid loan sharks at all costs.
14. Banks (in Uganda) Only Give You Money When You Don’t Need It.
This is an interesting lesson I learnt from dealing with several banks in Uganda, and one that’s most commonly echoed by small businesses. Banks operate to minimize risk as much as possible, and so in processing a loan for you, they will try to ensure that you are 100% capable of paying back the loan – with interest, which means they will ask you to show proof, commit security, produce years of financial statements, bank with them for at least three months before they approve the loan, produce assets to show your ability to repay, etc. By the time you complete the verification process, you realize that if you had everything they wanted, you wouldn’t need the loan in the first place. We had a bank that kept calling us to ask if we’re interested in a loan only when they saw we had significant cash in the bank, and even then they still wanted security, which the company didn’t have. The logic didn’t make sense at all.
Another pain point is that most small business owners don’t have the security that banks require in order to secure a loan, like land, houses, etc. Their asset is the business and their security is accounts receivable or a work orders.
That said, several banks are trying to develop (riskier) products for small businesses, including invoice financing based on a work order but the process is still complicated and convoluted for small businesses.
Risk Management
15. Put Aside An Emergency Fund
Emergencies happen in our businesses just as much as they happen in our personal lives. Constantly build an emergency fund to cater for unexpected developments outside of your day-to-day operations. And as is always the case with emergencies, be clear about what constitutes an emergency so you don’t misuse the funds.
16. Constantly Increase Your Runway
In the business world, runway is a definition of how long your company can go on making losses before running out of cash. This is typically because you’re either not earning revenue/getting investment or your current revenues are less than your expenses. It’s more popular within the technology startup space and your losses may be called burn rate in the startup world. Your goal, as business owner, is to constantly increase your runway. The longer your runway, the longer your business can and will survive. Thankfully, a lot of the lessons discussed already will help you improve your runway, like monitoring cashflow, reducing expenses, increasing revenue, etc.
17. Integrity is Very Costly
This is a very personal lesson for me, and one that I constantly share, because we missed and lost a lot of business simply because we refused to bribe people in the companies that wanted to give us business. Many Ugandan organizations and employees thrive on kick-backs, bribes and “handshakes” so that they can move deals forward, process payments or authorize projects. In one of the industries one of my businesses was in – design and advertising – bribes and kickbacks were so rife that it was tough any decent and consistent work – or get paid – without giving someone a cut of the business. Refusal to do that would mean you were black listed or worse, your payments would get delayed, affecting your entire business. We still have an agency that owes us money to this day.
So, that’s it. This list is in no way exhaustive, and obviously some people will have different experiences (like I know lots of people who’ve had success sourcing funding from banks). Either way, I do hope these lessons provide a little bit of insight for you and your small business, and help you avoid the pitfalls and mistakes that I – and many other business owners – make during the lifetime of their businesses.
I hope this was helpful. We’d love to hear your own lessons from your experiences or any other tips or feedback you may have. Please share your thoughts and lessons here in the comments, or on social media using the hashtag #RedNotebookFinance
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