Running a business is a monumental task. Most startups fail within the first 5 years of operations. The common cause of failure in businesses is the entrepreneur’s lack of financial discipline. It is impossible to succeed in running a business without financial discipline. In this article, we will explore different financial habits that can cripple your business. Let us dive right in.
All businesses require proper financing. A common mistake entrepreneurs make is starting a business with too little capital. This stern from a lack of adequate financial planning. It is important to have an adequate and realistic financial plan before starting your business. This will enable you define the capital requirements of your business and concentrate your efforts on sourcing the finances needed for the business. It is a well-known fact that financial institutions are not willing to lend to failing businesses. If you start your business with too little finance and you end up struggling to ensure the business succeeds, you will not be in a good position to secure a loan (M. Deane, 2022).
Another mistake entrepreneurs make is expanding their businesses too fast. To help us understand this point, let us discuss it with our friend Jane. Jane is a small business owner in the fashion industry. She started her business two years ago and has had some success within the fashion industry in Lagos, Nigeria. She currently operates in a makeshift fashion studio in her house and is looking to expand her operations. She figured the more outlets she has the more customers she can reach. Using the money in her reserves, she decides to open two stores in Victoria Island which required a large initial capital outlay. Besides the cost of renting the stores, she had to buy equipment and machines needed to run the stores. She also had to hire amateur fashion designers to assist in running the stores. In the first year of expansion, she had very few customers come in and could not break even. Within the second year of her expansion, she had fully depleted the fund reserves she built up from her first store footing the bills from her Victoria Island stores and subsequently had to shut down the stores. A lot of entrepreneurs have been in Jane’s shoes, seeking to expand their businesses quickly and end up failing in their expansion plans. Expanding a business must be treated like you are starting a business all over. To succeed at expanding, adequate research must be conducted. If Jane had conducted her research, she would have noted that the cost of running two stores in a location like Victoria Island could easily wipe out her entire saves and most likely would have taken a more conservative approach like opening one store first. In seeking to expand, we should try not to be greedy and do our due diligence.
The last and, in my opinion, the most important habit we will be discussing is not defining your salary as an entrepreneur. Some business owners treat their businesses as an extension of themselves. They see the business revenue as their profit and consistently withdraw funds from their business accounts for personal use (T. Nwazor, 2017). It is important to treat your business as a separate entity and define a portion of the business’ profit that will be allocated to you as your “salary”. Doing this would ensure your build your business reserves for subsequent business needs.
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Deane, M. (2022, January 10). Top 6 Reasons New Businesses Fail. Investopedia. Retrieved January 16, 2022, from https://www.investopedia.com/financial-edge/1010/top-6-reasons-new-businesses-fail.aspx Nwazor, T. (2017, June 13). 6 Money Habits That Could Cripple
Your Business Over Time. The Hour. Retrieved January 16, 2022, from https://www.thehour.com/news/article/6-Money-Habits-That-Could-Cripple-Your-Business-11213762.php