EASY ADVICE #2 My First Mistake In Business (Which I Am Still Trying To Fix To This Day)
Updated: Jul 9, 2020
If I could go back in time to give my optimistic, innocent, uninitiated-self one piece of business advice, it would be to keep proper financial records for the business from day one. My failure to do so was the number one reason for Hotbox Studios going under, it is the number one reason for making costly and uninformed decisions and over the last decade it has set our business operations back with at least 2 years. This is not a particularly glorious or fun or sexy part of the job but just as your body has a highly sensitive nervous system which allows you to know what is happening to you at any given time, so a business needs a system of financial controls which allows the entity to ‘feel’ what is happening to it, otherwise you end up with your hand on a hotplate or your foot on broken glass. Here are three anecdotal examples of how a lack of proper financial records could hamstring the growth of your business:
Access to Credit
As a business, you will need access to credit in order to grow. However, most financial institutions require at least 3 years of Annual Financial Statements (AFS) in order for them to assess your business and analyse your risk profile. What this means in reality is that for each year that you don’t prepare AFS for your business, you delay your access to credit by a corresponding amount of time. Case in point, we founded Park Acoustics in 2010, but we only started keeping proper financial records from around 2013. In 2014 we wanted to open Capital Craft Beer Academy, but even though Park Acoustics was 4 years old and had at that stage grown into a profitable and sustainable business, we only had one year worth of AFS to submit and as such we could not use the Park Acoustics financial profile to raise any capital in order to open Capital Craft. It was only in 2016 that we had enough of a track record to use Park Acoustics to apply for any significant lines of credit. Had we prepared proper AFS for Park Acoustics for the 2011 and 2012 financial years as well, the banks would have seen a small business showing strong growth and that would have helped a lot, even if it was just to obtain an overdraft.
Keeping your finger on the pulse
The arrow of time moves only in one direction and once you have incurred an expense it is almost impossible to recoup it. Aside from budgeting and forecasting, financial reporting is primarily a reactive process and you only see the results after the fact. What this means is that if you don’t maintain accurate as well as timely financial records, your expenses can run away with you without you even being aware of it and by the time that your financial nervous system alerts you to the danger, it could already be too late. So lets say that you fall behind on your admin and for a period of three months you neglect your financial reporting. In month 4 you catch up and see that you have been overspending completely on a certain expense category. Not only will it take time to fix your mistake, you have also already been making the mistake for 3 months without you knowing it. Case in point, when we opened Capital Craft Centurion as well as African Beer Emporium at more or less the same time, my workload multiplied at a tremendous rate and I fell very far behind with my financial record keeping. It would often take 4 or 5 months before I could really catch up and take a deep dive into the finances in order to interpret the data and see what is going on. The results would often floor me and send me into a fearful, regretful, hopeless panic. Warren Buffet’s number one rule is “Never lose money”. The only thing worse than finding out that you have been losing money, is knowing that you could have prevented it at the time but now it is too late.
It doesn’t get easier
If you think that keeping financial records for your freelance design side-hustle is a pain in the neck, I have a surprise for you. As your business grows, so does the volume as well as your legal compliance requirements and very soon your simple operation is necessitated to prepare and present more detailed financial records in order to comply with the relevant Tax and Employment legislation. What this means in reality is that if you don’t get into the habit of keeping proper financial records from the beginning, it will only become more and more burdensome and complicated as time progresses. Case in point, at the time that we opened Capital Craft Beer Academy, Park Acoustics had just recently registered as a PAYE employer as well as a VAT vendor. I was therefore still struggling to deal with these new elements of financial recordkeeping when Capital Craft opened up and I went from dealing with a company with 50 transactions a month to one with 150 plus transactions a day. Yes, at that time we made use of bookkeepers to assist in this onerous task but the problem with delegating away this responsibility is that you don’t keep your finger on the pulse anymore. It was only by the end of 2018 that I reached a point where we had a system in place where we could have accurate and real-time access to financial records which enabled us to make informed business decisions and once again, this timeline could have been moved forward with at least 2 years if only I could have listened to my own advice.
With all of this being said, I am happy to announce that it is not all doom and gloom in this respect. Today there are multiple software packages, online tools and even mobile apps that will assist you. Financial record keeping, much like any other business process, should be viewed as a constantly evolving challenge and there is always room for improvement. Sage Accounting has definitely changed my life for the better and cut my workload when it comes to financial record keeping with at least 60%. It has also allowed me to work remotely and even while I was touring through Africa for 3 months, I was still able to reconcile bank statements and supplier accounts on a weekly basis, track financial performance for our group of 5 companies and submit VAT returns on time. I would highly recommend
it to anyone with a small or medium sized business and will also gladly assist in setting it up in your own enterprise. Sage Accounting costs approximately R250 per month. I also make use of Receipt Bank for Park Acoustics, which is an app that automatically captures Tax Invoices for you which eliminates the need to manually capture each transaction and it is fully integrated with Sage Accounting. Receipt Bank costs approximately R260 per month, depending on your usage. Finally, if you are just starting out, I would recommend that you make use of the Old Mutual 22Seven app to manage and track your finances. Although this app is primarily aimed at managing your personal income and expenses it should work really well with a micro or small business that is just starting up. It is super easy to use and once
you have linked your bank account, it does most of the tedious work for you. 22Seven is free to use, although you will probably receive some marketing material. The key to all of the solutions above is that they work with rules to map out your financial transactions. It takes time to set up the accounts and rules that you will be using, but after that is done it is a breeze. For example, Sage Accounting and 22Seven syncs with your online banking and over time it gets to know and remember all of your financial transactions with rules that you create. Therefore, eventually you don’t need to do any work and simply have to review the transactions every now and then (although you should do it on a weekly basis at the least).
To summarise, running a business without a proper system of financial record keeping is like trying to drive a vehicle without any dashboard gauges or meters. How fast are you going? How much fuel is left in the tank? How far have you driven and is the engine overheating? Is the oil running low? Yes, it is possible to get to your destination without this information but it also increases the odds of breaking down, stopping without fuel, getting speeding fines or damaging your engine. This becomes especially true with high-performance vehicles that are finely tuned to excel.
About the author:
Willie van der Schyf graduated from the University of Pretoria with a B.Com Law and LLB degree, he is currently the CFO of ACME Holding Company who owns Park Acoustics, Capital Craft, African Beer Emporium and Easy Agency.