A friend of mine runs her own fashion label and seemed to be doing really well. Her office was in a great location in Dubai’s Jumeirah and was decorated in such a way that people would want to work with her. Plus she had A-list clients from across the GCC.
Then one day, I noticed she had stopped posting on her social media channels. When I asked why, she told me she had put her business up for sale but there were no interested buyers. After meeting and discussing her situation, I realised the business had suffered some cash flow problems. Yes she had clients that paid really well, but she had gone overboard on her spending.
When I started my fashion line seven years ago, I faced a similar issue. My father had helped me with some initial funding but I underestimated the need for accounting from the outset. It was only after a couple of months down the line that I had set up a good accounting system. Working with entrepreneurs on a daily basis, I know that many of them make the same common financial mistakes:
1. High fixed costs
Fixed costs are expenses that you have to pay every month regardless of whether or not you have clients. These include: rent, mortgage, water and electricity bills and salaries. When you start a business, you must keep a close eye on these costs and they need to be justified. For instance, do you need an office of that size? Does it have to be in a prime location? You could easily opt for a smaller working space and perhaps have your staff working remotely. During your business’s early stages, it is important to keep your costs low.
2. Over-anticipating revenues
At the early stages of a new business, you may be overly enthusiastic and optimistic and there is nothing wrong with that. In fact, that is the exact kind of attitude you need. I remember a young woman I bumped into in a bank, where she wanted to open a business account. When her banker asked her how the business would be doing by the end of the year, she said she hoped it would be making millions. I loved her energy, and I hope she did make her millions, however, you must have realistic revenue projections as you draft your business plan for the year. Sometimes your revenues are affected not by your quality of work or service, but due to external factors such as a turbulent economy.
3. Failing to draft a yearly budget
Budgeting at the end of every financial year is not my favourite exercise to do, but it is important because it helps you plan your expenses a year ahead. Projecting where the money will be spent every month is important to help you avoid unnecessary debts and financial situations. Not every entrepreneur has a financial background and drafting a budget is something that might be out of your league. So work with freelance accountants. Although you will be tempted to spend on many things when you first set up, focus on what is really important.
4. Getting in debt
Many entrepreneurs have no option but to take loans from a bank to start their business and many UAE banks offer attractive options. But this could tempt you to take on debt you cannot manage further down the line. Bank loans may be a cheaper option than venture capital, but they can also be highly risky. You have to pay the bank back regardless of your business performance. If you absolutely have to take a loan, only borrow the amount that you need.
Managing your finances efficiently could save you so much drama and also your business in the long run. If you are not a big fan of numbers, like me, and prefer the fun aspects such as product development and marketing, just remember it is a crucial aspect that should not be overlooked.
Manar Al Hinai is an award-winning Emirati writer who manages a branding and marketing consultancy in Abu Dhabi. Twitter: @manar_alhinai.
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