Financial Mistakes that Small Businesses Make All the Time
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Start-up is the new reality the entire world is waking up to. India too is not far behind. According to the Economic Survey 2015-16 released by the Government of India, the country has more than 19,000 technology-enabled startups, led by consumer Internet and financial services startups, the report said. The report also says that though India's startup ecosystem continues to expand at a swift pace, the exit options for risk capital investors, who have poured in billions of dollars supporting domestic ventures, remain uninviting. Time is apposite for the new and small businesses to be aware of the financial mistakes that they make all the time, to make the start-up ecosystem a sustainable one.
Let’s see what the leading financial experts say about these mistakes :-
Subir Dutta, is a CPA, MBA and Masters in Human Resources and Industrial Relations and a BS Majoring in Finance, Marketing and Accounting from the University of Oregon, USA. He has about 22 years of experience in assurance, management consulting and human resource consulting assignments spanning across USA, Europe, India, Australia, South-East Asia and the Middle East. The extent of his work-experience is varied and includes Finance, Marketing, HR, Information Technology and Administration. He is currently a Director of Doshi, Chatterjee, Bagri & Co. and BKR Consultants Pvt. Ltd and is currently the Group’s Chairman. Here is what he says:
Minimising costs and failing to make prudent investments
Often small businesses in their effort to minimise costs, tend to cut corners when it comes to making prudent investments in human resources, technology and infrastructure. This often turns out to be the bane for the businesses going forward. It is essential that small businesses make the correct decisions to invest at the start up stage so as to ensure that there is a firm base on which the pillars of the businesses can be laid. Wrong investments often result in making compromises which prevent the business from having a strong foundation. Once the businesses run into heavy weather, it is very difficult for them to stabilize and then survive.
Having too much of financial exposure
Another common mistake for small businesses is to have too much of financial exposure in terms of bank borrowings which results in them being highly leveraged. Often this results in high interest cost which weighs down on the financials of the company again squeezing margins.
Taking up multiple roles
Often as a course to save money, small business owners end up taking on multiple roles including ones which are beyond their core competencies. As a result they often end up taking wrong decisions.
To overlook prudent tax planning
Another mistake is often to overlook prudent tax planning out of ignorance which again results in causing legal and taxation problems for small businesses which again diverts energy and resources away from the core competencies of the business.
Debasish Dutta is the Managing Partner & Director (Projects) for Orange Corp and takes care of the Venture Capital Investments & Advisory for Asia, Europe & US. Orange Corp is a Global Venture Capital and Management Consultancy firm with presence in 26 countries. His word of caution:
Discipline in financial matters is the basic necessityBusiness is for revenue earning and discipline in financial matters is the basic necessity for growth. Entrepreneur of a business should keep the
business at an “arm’s-length” and decide what is right in the interest of the business. What’s right for the business will be just right for him / her. When they tend to forget this, many expenses of personal nature hit the books of accounts and he / she ends up paying higher income tax during assessment.
Lack of awareness and accurate data
What is a small business today might grow big if the person is aware of his direct income and expenditure related to the business alone which is missed out in most cases and this results in wrong decisions being taken due to lack of accurate data.
Awareness of the responsibilities towards statutory compliances
Last but not the least; entrepreneur should be aware of the responsibilities towards statutory compliances which are mandatory and specific to his / her business. Ignorance of law is no excuse and there are penalties involved for defaults which again have financial implications.
Avelo Roy started his first startup at 19 while still a student at Illinois Institute of Technology and built it to a million dollar valuation by the time he was 22. He has been building businesses in the US ever since. Currently Avelo Roy is Cofounder and CEO of Kiuqi, LLC (Chicago), Executive Partner, Pongworks (Chicago), Co-owner and Director, ECC Engineering Pvt. Ltd. (Kolkata). Avelo’s latest company is Kolkata Ventures promoting entrepreneurship in Eastern India. Avelo mentors entrepreneurs every day learns from people’s mistakes. It helps him evolve as a mentor as well as make better investment decisions. Here are three common financial mistakes that he feels small businesses make:
Don’t cut corner on marketing and sales
Most small businesses try to cut corner on marketing and sales. So many companies don’t invest enough in paid ads, good designs for marketing materials (website, brochure, Facebook posts, promo videos, etc) and wonder why they are not growing. Don’t go for free resources when it comes to marketing. Hire the best creatives and pay for high quality work. By high quality I don’t necessarily mean pretty, but actually effective in converting your leads to paying customers. Think of Amazon’s homepage. Is it pretty? Arguable. Does it convert? Hell ya!!” informs Roy.
Don’t waste money on fancy stuff
Don’t waste money on fancy offices with ornate furniture and a gorgeous view. Get what you absolutely need given your business type and number of employees. Remote working is fine. Converting your guest room into an office is more than ok. You can meet clients at coffee shops. If you really want to pay, why not go for a co-working space? If you are in a business where there is a lot of client meetings and your employee count is growing then by all means go for a commercial office.
Hire the best people for the job even if it costs you a bit more
Time is more valuable than money. It is often seen that small businesses hire B grade talent to save money in the short term. Less experienced people end up spending more time and delivering inferior quality work. This hurts your ability to retain customers and gives advantage to your competitors. You are basically killing your business. So hire the best people for the job even if it costs you a bit more. See it as an investment with long-term benefits.