5 investment dos and dont's for young entrepreneurs
Entrepreneurship has been recognised by Government as a key driver of future economic growth in South Africa, yet the unfortunate reality is that many of today’s budding entrepreneurs rely on their own personal savings to start and build their businesses.
Referring to the 2018 Real State of Entrepreneurship Survey, which found that 88% of South African entrepreneurs are self-funded, Gugu Mjadu, Spokesperson for the 2019 Entrepreneur of the Year competition sponsored by Sanlam and BUSINESS/PARTNERS, says that it is no wonder then that a lack of funding remains one of the primary barriers faced by young entrepreneurs.
“Despite there being various institutions with finance available for local entrepreneurs, young entrepreneurs are often unsure of how to go about the application process or lack the collateral required to obtain adequate business financing.”
In addition to this, Mjadu explains that even for those who do secure funding – there may come a time when you need to supplement it with personal funds.
Either way, this should not deter you as a young, hopeful entrepreneur, says Mjadu. She offers the following tips for self-funding your entrepreneurial dreams.
Create a detailed business plan
Just as you would be required to do if you were applying for external funding, Mjadu says that the first thing any hopeful self-funded entrepreneur should do is draw up a comprehensive and well-motivated business plan. “From a financing perspective, give specific attention to the risks and rewards associated with the total investment required. To do this, it helps to focus on four key areas, namely, the business itself, the management of the business (the entrepreneurs involved), the market in which the business operates, the financial plan and projections.”
Define realistic funding requirements
Once a detailed financial plan exists, Mjadu urges young entrepreneurs to set realistic funding requirements, based on the business’ needs. “Based on your business plan, you need to determine the level of funding the business requires at each stage of operation. These funding needs will vary depending on many reasons including the nature of the business and how much own capital the entrepreneur has, but should be kept as realistic as possible.”
This helps to put things into perspective, says Mjadu, as she points out that the funding needs of the entrepreneurs are often not as high as we may think. “The 2018 Real State of Entrepreneurship Survey revealed that 28% of entrepreneurs needed less than R10,000, while 30% needed less than R50,000.”
Separate and formalise your business savings
Right from the onset, Mjadu says that entrepreneurs should keep their business savings separate from their personal savings accounts and investments. “These funds you are saving for your business, should be geared for maximum growth. This could be a high yield, fixed term deposit account, a long-term investment product, or a dynamic and interest bearing savings account, through which you could save business profits to yield growth in interest,” says Mjadu. “The type of vehicle you choose to use depends on things like the time horizon you have to save, how risky you can afford to be and how quickly you may need to access the funds.”
While there are guaranteed to be some bumps in the road along the way, Mjadu says that consistency is key when it comes to saving money towards self-funding your business. “Just as you would for your retirement savings, you need to put away a set portion of money each month for your business dream. Setting up a debit order may be useful in this case to avoid the temptation of spending the money elsewhere.”
Seek professional advice
When starting a business, it is important to surround yourself with people in the know that can enhance your business.
These range from an industry advisor who can be an experienced entrepreneur to show you the ropes within your industry, a financial advisor that can guide you on saving money, adhering to your financial plan and even provide guidance around applying for external finance.
Having a mentor providing guidance and emotional support can also go a long way towards alleviating the loneliness of an entrepreneurial journey.