OPINION: Beware of these pitfalls when starting a business
The money is burning a hole in your pocket as you struggle to make the best possible decision about what to do with it. Then, a friend talks you into a new business venture - opening that beauty salon you have always dreamt of or turning your guest room into Airbnb accommodation.
Enticing, isn’t it? But will it be a smart investment?
According to bizmag.co.za, although statistics vary on average about 50 percent of all start-up businesses in South Africa fail within 24 months due to the inability and inexperience of their owners.
When someone starts a business it’s about striving for better.
Everyone wants that for themselves and for their families, but a lot hinges on finances - making better and smarter financial decisions are key to the success of your new business, and safeguarding the investment of the money you are putting into it.
All the money in the world will not save your company from ruin should you not be managing your finances properly.
Six pitfalls to be aware of when putting your life savings into a new business:
1. Budgeting with blinkers on - there is no room for guesstimation when you are drawing up a budget for business and personal expenses. You have to be realistic as your personal living expenses will also be high; you cannot survive on a bare-bones budget. Stick to your budget and adjust it as the month progresses.
2. Diversifying too soon - wondering where to invest your profits? Why not in your own business? Too many business owners branch out and diversify with profit instead of retaining the cash in their own business. Stick to your knitting, focus on your core business and use your profit to help grow what you know.
3. Focusing in the wrong places - you should be prioritising revenue generation. Everything else (marketing material, signage, and website) can wait. Focus on the things that will actually drive revenue. A positive cash flow puts you in the driving seat to make good decisions and in the good books with creditors, like the bank.
4. Flogging a dead horse - if something is not working, abandon the idea and move on. Continuing to flog a dead horse will drain your resources and set your business back. The sooner you make the right decisions and focus on what is working, the better.
5. Ignoring the writing on the wall - as mentioned, many small start-ups don’t make it. You may find yourself in the same boat and have to snap back into reality and get a job again. If this is what needs to be done then be humble enough to do it, regardless of what anyone else thinks of your “failed” venture.
6. Failing to explore the right investment opportunities - one bad investment can sink your business. If you don’t know what to invest in, seek out sound financial advice.
Neil Thompson is the head of product and customer value proposition at African Bank.