14 July 2012
WITH over 90% of businesses in Malaysia comprising small and medium enterprises (SMEs), one can expect the quest for survival to be fierce and intense. Having the right financial strategy in place is definitely a key ingredient for success, but even the most seasoned entrepreneur makes mistakes.
The following are just a handful of the financial errors that small businesses can and do make – and need to avoid.
No business plan
Thiam Hock: ‘SMEs must be cash reserves for one year’s operations on a prudent sales forecast.’
“Many ‘take the plunge’ at starting up a new business without listing down their near-term and long-term goals,” says one industry observer.
“Most people go in feeling quite ‘gung-ho’ about their prospects, thinking and hoping that it would be a smooth sailing journey – only to end up closing shop soon after. It’s like the old adage says – if you fail to plan, you plan to fail,” he adds.
Peoplelogy Group founder and chief executive officer Allen Lee Chin Min concurs with this adage, pointing out that one of the main reasons that businesses don’t succeed is because they fail to come up with a sustainable business plan.
“The most important business plan is to know how to reach out to your target customers. The customer shapes our business, hence it is essential to have a solid plan on capturing them.”
Lee says there are two main ways to “capture” a customer - through the staff and the methodology of an organisation.
“People (your staff) are the ones that help companies target customers and serve them with an effective methodology.”
Deloitte Malaysia country managing partner Tan Theng Hooi too concurs that many SMEs fail to take off because they do not have a proper business plan.
“It is crucial for businesses to have a strategic plan to see through their growth and manage the identified challenges ahead. The strategic planning requires the participation of key managers in the organisation and regular review and evaluation.”
No sufficient reserves
Alliance Cosmetic Group founder Tan Thiam Hock says inexperienced founders tend to be over-optimistic with their sales forecast and under estimate their expenditure.
Theng Hooi: ‘It is of utmost importance to leverage on technology to remain competitive.’
“There are many that fail to plan for extra expenses that crop up suddenly. This can be a major drag on their cash flow plan, which can end up affecting the funding of their operations.”
Thiam Hock adds that new business owners should budget for at least a year when they start up a business.
“They must also have sufficient funds to sustain their family expenditure for that period. At the same time, they must have sufficient cash reserves to cover one year’s operations on a prudent sales forecast. This is the most vital period of the organisation.”
Theng Hooi concurs that cash management for most SMEs can always be improved.
“Many operate without proper cash flow budgets, thereby resulting in paying more interest cost which could have been avoided if there were proper cash flow plans.
“Choices made on methods of financing working capital, investment or a project may not be the best option. Decision to use term loans, overdrafts, leasing or equity to finance often have different financial implications.”
Thiam Hock points out that in their urgency to achieve high sales, SMEs tend to have loose credit control and fail to check properly the background of their customers.
“When their customers delay their payments, everything gets jammed up. Most small businesses also do not keep a proper accounting system. So they have no data to work with and they do not do cash flow forecasts.”
Not seeking advice
A common mistake SMEs make when starting up a business is not getting tips from an expert.
“It doesn’t hurt to get some insight or advice from experienced players or those that have been in the field a while,” says an industry observer.
Lee says a good way for SMEs to gain insight is to attend business seminars organised by non-government organisations and SME organisations.
Lee: ‘The most important business plan is to know how to reach out to your target customers.’
“Learn from the renowned speakers and entrepreneurs who can give new business owners more insight on building and growing a business.”
Theng Hooi believes many SMEs do seek advice on areas they are not familiar with.
“The issue is how much of the advice do they understand, especially for new start-ups.”
Thiam Hock however points out that in some instances, SME owners already do have relevant know-how to start a business.
“SME’s that are started by founders who have worked in the same industry have better knowledge and experience so they stand a better chance of surviving or prospering.
“The key learning curve will then be focused on managing a company of which, raising sufficient cash and managing cash flow is crucial.”
Being small organisations, many SMEs tend to cut cost as much as possible and rarely invest in or leverage on the latest technology to be competitive.
“One of the major financial mistakes made by small businesses is that they do not know how to leverage on technology to manage their financials,” says Lee.
Not investing in technology
He adds however that SMEs do not have to invest significantly in the latest technology tools to become competitive.
“All they have to do is to invest a little bit of time to learn the existing tools that are around them, such as Microsoft Office, which is one of the most powerful tools commonly used by individuals and businesses, regardless of their business size.
“It’s a very simple and powerful tool for SMEs to complete their profit and loss, balance sheets, cash flow management with a customised Microsoft Excel application.
“Small businesses can also leverage on Microsoft Office Outlook to manage their customers and meeting deadlines too. Apart from that, an effective Power Point can impress customers on proposals.”
Theng Hooi notes that except for the very top SMEs, technology is not exploited sufficiently in their businesses.
“Information and communications technology adoption is rather low and mainly limited to basic utilisation. It is of utmost importance to leverage on technology to remain competitive and be on par with global players,” he says.
Investing unnecessarily
Being a small business with limited start-up capital, many SMEs, despite being conservative, also do make the mistake of investing unnecessarily.
“Sometimes, they save their money on things that are a necessity but invest unnecessarily on products and equipment that they don’t really need,” says an industry observer.
Says Theng Hooi: “Most SMEs are rather conservative and careful on their spending as they do understand that if their investment fails, it will have a significant negative impact on their business. Very often it is the lack of investment to take the business to a new level.”
He adds that many SMEs also do not invest enough in talent and infrastructure to ensure that proper financial statements are reliable and prepared timely.
“Very often the finance and accounting team is under-scale and not experienced enough to handle the task required of them, while the financial and accounting systems used are outdated.
“Many SMEs also underestimate the importance of having a strong and technically competent finance and accounting team and also under invested in the necessary financial reporting systems.”
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