How to avoid the three most common mistakes SME owners make

WHILE the entrepreneurial journey can be riveting and full of promise, entrepreneurs will inevitably encounter challenges as they progress towards achieving their goals.

Three of the most common mistakes that small and medium enterprise (SME) owners make, particularly in the first few years, involve two of the most important business pillars – people and profit. It is important that you look out for these frequent pitfalls and understand how to mitigate them.

Not managing cash flow efficiently

Poor financial management can have huge ramifications on the sustainability of your business.

A survey of 400 local entrepreneurs, conducted by Xero, found that “being irresponsible with cash flow” was the most expensive mistake businesses made in the past 12 months. The mistakes, caused due to a lack of financial knowledge, cost South African SMES an average of R90 000 a year.

One of the most common snares involving cash flow is underestimating operational costs. Proper forecasting therefore needs to take the hidden fees of doing business into account, as well as the smaller, miscellaneous costs. Some of these include the cost of licences and permits, office utilities, equipment and machinery maintenance, asset depreciation and interest on business cash loans.

Cash-flow management involves striking a delicate balance between incoming revenue and outgoing expenses. The efficiency of a cashflow cycle can be interrupted by factors such as payment delays, invoicing errors and inventory miscalculations, thus emphasising the need for developing financial basics like budgeting, forecasting and reporting.

Acting without sense-checking a decision

Entrepreneurs are problem-solvers and creative thinkers. As such, it can be argued that most entrepreneurs are optimists – they tend to see challenges as opportunities, find ways to innovate solutions and approach complex problems with a different mindset. While, for many, this is the most important trait, it can also become a roadblock.

When making big decisions, sometimes the most useful approach is to have someone who can bring in an element of pragmatism and provide an unbiased, outside opinion to sensecheck your proposed way forward.

Whether a friend, a mentor or a business associate, they could become an invaluable part of ensuring you don’t miss vital threats and risks. Neglecting to use contracts Many SME owners make the mistake of sealing a deal with a handshake, relying on nothing more than good faith to make things happen. However, this could cost you more than you can afford to lose. The reality is that not everyone you work or partner with will practise integrity.

This is where having a legal agreement and written contract in place, which stipulates all the finer details, could bring you peace of mind and clarity. Contracts are also a crucial part of how to write a business strategy that includes risk management to prevent costly legal disputes, business disruptions and reputational damage.

A misconception is that insisting on written contracts at the beginning of a business relationship is a sign of mistrust and a possible cause of offence. There is a more constructive way to think about it – contracts are legally-binding commitments which are the cornerstones of a successful business relationship. Having a contract is therefore in the interests of both parties and should be viewed as mutually beneficial.