5 crucial reasons startups tend to mismanage their finances

Financial Management is one of the main reasons many startups fail. And, sadly in many cases this is caused by the entrepreneur themselves, making them the biggest enemy to their own businesses.

Financial mismanagement is mostly as a result of all or some of the following reasons:

1. Lack of financial education and aptitude

Lack of financial education may cause entrepreneurs to live from hand to mouth i.e. cash is accounted for and is spent as it comes into the business. Financial education allows the entrepreneur to know in advance how the business is doing financially and to be able to take corrective measures to ensure the business survives and is profitable.

2. Inability to differentiate between personal and business

Entrepreneurs need to separate their personal and business accounts as running joint accounts may result in their business becoming bankrupt. On registration of a company, it assumes a legal persona different from that of its owners or founders and going forward the owners become merely trustees, with fiduciary duties and obligations to the business. A lot of startup owners unfortunately don’t understand this concept completely and, in rare cases, if they do, they simply don’t uphold this legal separation between themselves and their businesses.

3. Inability to differentiate between wants and needs

The biggest balance in the financials of an startup is normally its assets. However it is not uncommon to find startups that are undercapitalised as well. This, therefore, calls for a delicate balance when planning for the CAPEX (capital expenditure) needs of an startup.

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In most cases over-capitalised startups are holding expensive assets that they currently can’t fully use — for example when entrepreneurs acquire assets they want, but not necessarily need, in the business. Depreciation of these assets goes through the statement of comprehensive incomes and also affects all the key ratios e.g. profitability and asset return ratios. This effectively makes the business less viable, as opposed to a streamlined business with only the assets it needs to operate.

4. Lack of long term planning for the business

Long term planning for a business is essential and a detailed budget is key. The analysis of actual performance versus budgeted performance on a monthly basis is a vital management tool to better refine and adjust the operations of the business going forward. This allows for better management decisions to be made and where needs be, to adapt the performance projections going forward.

5. Lack of a coherent business blueprint and strategic plan

Most startups are started on the back of a single concept and not necessarily from a thoroughly researched sustainable business opportunity. As a result many startups do not start out with a detailed operational plan. This would include a feasibility study, target market analysis, extensive industry and market knowledge among others.

The lack of a coherent business strategy means that the business concept will undergo a number of changes. These changes don’t allow for the business to develop a critical specialised knowledge. Having a detailed plan from the start lowers the learning curve which will effectively lower the running costs in the long run.

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Without mastering the financial aspects of a business it becomes almost impossible for an startup to be sustainable and exist in future. It is therefore important that entrepreneurs take steps to understand or have an appreciation of financial management and how it affects the viability of their enterprises.

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