WHY IS FINANCIAL MISMANAGEMENT EASIER THAN FINANCIAL MANAGEMENT
This is a very scary article to write. Its overwhelming because as one who was trained and educated on cashflow statements, income statements, balance sheets, financial analysis ratios etc; life teaches you that it takes much more than theory, statements and mastering ratios to exercise fiscal prudence and be financially savvy in your own life and in your own start-up. It is way easier to do this where you have a boss (in employment) than where you are the boss.
WHY IS FINANCIAL MISMANAGEMENT EASIER THAN FINANCIAL MANAGEMENT
The issue of money management remains a very tricky one. For all of us. Money is more psychological than it is physical and definitely way more psychological than it is an accounting issue. #DearAllAccountingStudents
Money highlights your weaknesses, fears, insecurities etc. Through your spending patterns we can see how popular you were growing up, how important validation is to you etc. We can see how good a planner you are, how strategic you are etc.
That is why it is not as simple as to say “exercise financial discipline” to the most intelligent entrepreneur/business owner once you realise why humans fail to exercise logic where money is concerned.
That painful time however has come. We need to tear down and to face up to the reality of money and behaviours around money in our township and rural SME’s (more accurately, let me just say in our black SMEs all over!). We need to do this by starting to understand ourselves and how we relate to money first before we hope to understand how funders/banks and other financial institutions work. (Side note: Where money is concerned, entrepreneurs will always ask you about what is outside of the locus of control and lay blame on what is outside the locus of control than what is within but let me not digress…)
In my life, I have seen businesses that turnover more than R50m per annum not being able to raise bank overdrafts in crucial times or businesses that make over such amounts not being able to pay salaries if its clients are not paying fast enough. CLIENTS? Yep, no typo there.
• Why would the bank not provide an overdraft to a business that turns over R50m per annum?
• Why would a business turning over R50m per annum be waiting on clients to be able to fund its payroll?
These questions even make me wonder if perhaps is this not what experts mean when they say “you do not need more funding, you need more financial management” – a fool and his money are after all soon partying.
YOU CANNOT MANAGE AND DISCIPLINE WHAT YOU DO NOT KNOW: THE PSYCHE BEHIND FISCAL DISCIPLINE
These questions also make me think is financial management possible if you do not do a thorough analysis of yourself and get to understand yourself as a person before you are a business owner. In a networking event (called The Hustleflow Event) I recently attended in Illovo, Johannesburg I was forced to see the link of money to the psyche of the human. In this event a skinny looking Sjava caught my attention. He was part of a panel and he was in my eyes, the brainiest and wittiest of the lot. This Sjava was Mzamo Masito – Chief Marketing Officer of Google SADC. Here Masito shared that to operationalise self-awareness there were practical exercises one had to do such as to attend hypnotherapy and find out: the relationship you have with money and how you score own goals there. He shared other elements of your life that you need to look at as well but for purposes of this topic, he specifically said you need to take this information from hypnotherapy and gather feedback on reconstructing yourself by asking those close to you (if you have them, think employees or accountants) “what do I need to stop doing, what do I need to start doing and what do I need to continue doing”. From here you would then be able to draw a life plan on things like education, money and entrepreneurship/career. I was particularly overwhelmed by this information as I had always preached that money is more psychological and even spiritual than we assume it is. This operationalising of self-awareness exercise thus sealed it for me that the psyche had more to do with your financial behaviours than anything else.
GET TO KNOW MONEY AND GET TO KNOW YOURSELF
Think of this article therefore as a continuation from the last article on Managing the Processes of your businesses to minimise losses.
Masito summed it all up In less than a minute but reading this article you may or may not have picked up on important things highlighted by completing his exercise:
- The goal is to draw up a life plan ultimately and to find assistance to getting your life plan a reality.
#GoalIsToDrawALifePlan: WEALTH IS THE ULTIMATE GOAL
What is more important than making profits? Making profits sustainably!
Most will say we get into business to make money but most importantly we get into business to make money sustainably. We provide a solution and this solution must be the relevant solution to provide in the long term due to its sustainability. This is how our business will after all make money in the long term.
It is futile therefore to make money in business and not retain money.
“Collaboration is the new innovation”
– Octavius Phukubje
If you struggle to build reserves for your business, consider collaborating with fellow entrepreneurs to start saving to build your start-up businesses. If a start-up is a vehicle then reserves are the spare tyre. Who goes on a long distance trip without a spare tyre?
The stokvel industry is worth R25billion in South Africa (Stokvel Association of South Africa 2018) if you look at the 421000 registered stokvels registered with the Stokvel SA organisation. These amounts are hardly used to grow businesses – most stokvels actually are for expenses. Imagine if there was a stokvel to help you with your capital expenditure (capex)!
The best thing about a stokvel is entrepreneurs can use it as a loaning vehicle when they are in urgent need of cash for your operational expenses.
DON’T BE AFRAID TO RECONSTRUCT YOURSELF
- Reconstruct Yourself – Changing Mindset, changing spending patterns, changing lifestyles is totally important if the entrepreneur wishes for the business to be able to retain money in the business longer (than it makes it) and if the entrepreneur wishes for the bank to be able to provide the business with a clear bank code letter that will provide the business with access to all forms of financing.
#RECONSTRUCTYOURSELF: YOUR STAKEHOLDER IS YOUR BOSS
The truth is most people go into business expecting not to have a boss. The expectation therefore is to report to no one. The reality is you report to all your stakeholders including your banker and all possible investors or financiers. The sooner you realise this is the sooner you will ensure that your business processes are strategically designed to get you to
#RECONSTRUCTYOURSELF: INVEST IN PROCESS MANAGEMENT THAT IS DESIGNED TO SEE YOU WIN
My experience is “our people” love chaos – you will often find our businesses do not have proper accounting records, taxes are not in order, money in the bank account paid to personal expenditures remains unaccounted for and never paid back into the bank account etc. I am yet to establish if we love chaos because this chaos shows you that you are the boss or we are so busy in developing the product and developing the customers that we do not know how to ensure first world processes for our businesses – after all we are people of limited skills. Regardless of the reason, habits do however form. Because habits stick, this habit sticks with you until you build a R50m empire. That empire however still has poor processes and you have an empire that is struggling to get a bank overdraft.
Ideally a business should strive to have a clear bank code (think of it as a South African Banking system of providing a credit score for the business) so as to be considered for financing by the banks. The entrepreneur needs to ensure at all times, the business is at an operational risk level that is favourable by the banks. This letter can show you where you stand. If the bank as your stakeholder cannot provide clearance on your expenditures, there most definitely is a problem with your processes and financial management.
#RECONSTRUCTYOURSELF: AMENDING CASH FLOWS TO MATCH YOUR EXPENDITURES
Part of reconstructing yourself might mean change original strategy of the business to change cash inflow drivers of the business.
FINANCIAL RATIOS WILL TELL YOU HOW STRAINED YOUR CASH FLOW IS
There are particular ratios businesses can use to be able to see how long clients take to pay the business versus how long the business takes to pay suppliers. (*Google Daily Sales Outstanding or Daily Payables Outstanding)
If you pay suppliers in a shorter time than you take to make money from clients, this might mean that it could be time to look at bringing in a service that will alternate your cashflow by providing quicker cash.
This is the case particularly for businesses that work extensively with the government and struggle to secure cashflow in time.
The Business might be financing the life of the founder
The issue most start-ups have is to not live off the business. The entrepreneur is too quick to resign from work and now the business money is not retained as it is paying for the entrepreneur’s living expenses. The biggest mistake I ever made in business was celebrating that the business is making x amount per month and therefore because this is more than my monthly salary, I can afford to resign. Business income is just that and entrepreneurs need to differentiate between this and personal income for the duration of the business.
Big business has a dividends policy that dictates when dividends needs to be split so that the profits can be shared. Up until the dividends are split, there is no touching of business income for personal expenses. Small business often cannot have this policy because of how the entrepreneur depends on the business.
If you started a business because you have no income, then consider running two or more services concurrently. One will be the one that finances your life (ideally this should have high rate of unit cash sales per day or per week and low rate of credit sales) – this is the one that you will live off. Your daily, weekly and therefore monthly expenditure must always be limited to a % of what the business makes per day/week/month.
I tried sharing hacks on how to get around particular causes of financial mismanagement or lack of financial discipline.
Habits that you form at the formative stages of your business are what will grow as the business grows. As your business upscales and employs people, these are the habits that will duplicate and create your organisational culture regarding expenditure.
Consider this and get feedback on the habits that you have and how you can improve these. Be wise enough to take constructive criticism without being defensive.
Written By: Thembi Tabata