Avoiding the pitfalls of an uncertain business world

avoiding-the-pitfalls-june-2014

As Youth Month comes and goes every year, the lamentations over South Africa’s high youth unemployment reach a crescendo, together with calls on young people to start their own businesses. But somehow not enough is ever said about the serious survival gear needed by anyone venturing into their own business.

The business world is an uncertain place, says Byron Jeacocks, Business Partners regional general manager, who, as an experienced financier of owner-managed businesses, has seen many ventures fail. “We tend to aspire to the successful entrepreneurs, but we don’t see the six who have fallen by the wayside for everyone who succeeds,” he says.

But the good news is that there are clear patterns in these failures, showing that the pitfalls are mostly predictable and can be avoided.

The most common blunder made by entrepreneurs, says Jeacocks, is a failure to use financial statements and forecasts to make business decisions. The business world is so uncertain that navigating it without a map is sure suicide. The survival map needed by every entrepreneur is a business plan, the most important parts of which are the financials and cash-flow projection. “A business plan is my map of where I want to go to in an uncertain world. Business is massively uncertain, and if you don’t have a plan of where you are going to, you’re in a lot of trouble,” says Jeacocks.

The best entrepreneurs and most successful organisations work with various layers of planning and projection. Business Partners, for example, works with a one-year plan in the context of a five-year projection. The plan is a living document that “doesn’t just happen by accident. Meeting upon meeting” is held to hammer it out and to get everyone to focus on it, says Jeacocks. Projected expenditure is constantly compared with actual expenses, and the plan is regularly updated.

Why is it that so many business owners use their financials for tax compliance or finance applications only, and prefer to leave it gathering dust in a file while they stumble on blindly from one crisis to another?

Jeacocks says there are many reasons. Some business owners never learn how to read financial statements and don’t know how to use them in decision making. Others try to avoid the cost of keeping financials updated, without appreciating their value, and some business owners even find the truth revealed by financial projections too uncomfortable, preferring to operate in blissful ignorance.

Another common pitfall for business owners is over-trading, which Jeacocks believes is just as dangerous as under-trading. With over-trading, entrepreneurs bite off more than they can chew, causing extremely stretched budgets and cash-flow crises. “If you don’t have the resources to sustain the level that you’re trading at, and one client goes broke on you – that’s you finished in business,” says Jeacocks.

Business owners tend to try to expand “from a position of weakness”, without having the required resources in place. Again, the protection against over-trading and expanding too fast lies in proper planning.

Choosing the right staff is another area in which many business owners flounder, says Jeacocks. In a small business reliable workers are even more crucial than in larger organisations. “If there are only five people in the business and one of them is not working properly, that’s 20% of your workforce. It can bring your business down.”

Yet many business owners tend to take a lottery-like approach to appointing staff. Instead of doing proper vetting, the first job-seeker that comes through the door gets the job, often with results so disastrous that the costs of using a professional placement firm looks positively cheap.

It is often worse not having a worker at all than having one who does not perform. “If you don’t have somebody (to do a particular job) you know it’s going to be a mess and you look out for it. But now you have someone, he’s not working, but you’ve stopped looking out for the mess,” says Jeacocks.

Business owners need to adapt their lifestyles according to the strength of their businesses. A very common pitfall for business owners is spending more than they earn. Once again it boils down to a lack of planning, which keeps entrepreneurs ignorant about how much spending they can afford.

It also relates to a further pitfall, says Jeacocks: business owners need the commitment of their families to the business because of the sacrifices that the family will have to make. “When you are growing a business, you are not going to be able to spend every Saturday watching your kids play sport,” he says.

This is why it is important for entrepreneurs to like what they do. If you are in it only for the money, then the long hours, the uncertainty and the sacrifices will probably have you throwing in the towel before long. But if you are driven by something else, such as the idea of becoming independent, seeing your business grow, being your own boss or leaving a tangible legacy, then the business world, with all its pitfalls, becomes an exciting place.