Quick snippets from my morning read on Thursday, 26th November 2020
Today’s morning read highlights some of the lessons from the article written by our very own, Solomon King, curator of the Red Notebook and Founder of Fundi Bots. We highlight 6 of the 17 business finance lessons from his 17 years experience as an entrepreneur.
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.
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).
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.
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.
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.
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.
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 getting 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.
Read the full article with all 17 lessons here
And as always, if you enjoyed this, check out the rest of our daily snippets, curated daily, right here on The Red Notebook.
