Run it as a distinct entity

A business should not be run as a hobby but as a serious profit-making entity.

MANY entrepreneurs fail the ultimate management test of keeping their businesses running as distinct entities.

This often results in various corporate governance challenges and collapse of the enterprises.

This is not limited to small businesses as it also affects medium-sized firms, big corporates, and State-owned entities.

One important lesson that has to be considered is that a business has a separate legal persona, meaning it can sue and be sued in its own right.

And many entrepreneurs do not seem to understand this, which is a tragedy.

It is folly to think that by virtue of founding a company one has carteblanche to do whatever they want with its resources.

This has obviously accounted for many local business failures, especially fledgling enterprises.

This anomaly needs to be corrected since informal businesses now account for the bulk of local economic activities.

In order to rein in potentially harmful interference from business owners, it is fundamental for businesses to keep business records that store every business transaction, including by the owner.

Records, if religiously kept, can provide a dashboard of how the business is faring.

They also raise the flag in instances where business owners excessively resort to the cash till to fund their personal lifestyles.

The temptation to unwittingly plunder the business is therefore kept in check.

That a business is doing well is not good reason for the owner to draw unwarranted sums from it.

Adequate cash stocks are required for reinvestment or expanding the business. In any case, savvy businesspeople always save for a rainy day.

It also has to be considered that constant cash withdrawals can result in failure to pay salaries, suppliers and statutory obligations.

In a professional set up, even the business owner is only entitled to draw his salary only when other key obligations have been met.

Just because a business has a separate legal persona, it also means its finances, operations, and policies have to be handled differently as well.

As experts say, the more you begin to think of yourself as “working for your business” or even “an employee of your business” who happens to call the shots, the better!

Well, of course it is easier said than done, but that is what distinguishes successful businesses from failures.

Investors must be prepared to be in business for the long haul.

Establishing a business is not the be-all and end-all; it also has to be nurtured for it to grow.

The progress that one makes when a business is performing optimally has the potential to unravel when it folds. One risks losing it all.

Cars, houses and other properties are often auctioned off by creditors once a business fails. In addition, mixing business and personal expenses always gets one into trouble with tax authorities. Clearly, personal expenses are not considered as deductions when calculating income tax.

A business should not be run as a hobby but as a serious profit-making entity.

And in cases where cashflow problems surface, it is usually an indication of structural challenges affecting the business.

The fatal mistake that indebted business owners make when their ventures show signs of faltering is to resort to loans, most of which are extortionately priced.

It is unsurprising that most of these loans often fail to perform. Sooner rather than later, the business finds itself in the red again.

Quoting from one of Mr Strive Masiyiwa’s Facebook posts, he says “Your business must also have a life! It’s important to allow your business ‘to get a life of its own’, separate from you. It must be a separate living persona that has its own needs, separate from you. You are not the business and the business is not you.”

He went on to say if you cannot do that, you will never be able to own a truly big business. Sounds like tough talk but this is very true.

A human being needs food, clothes and shelter to survive, a car needs to be serviced and fuel for it to run, plants and crops need water, manure and other conditions to survive.

A business also has needs and if it is not well serviced, it will collapse.

Starve suppliers and employees their cash, they will file lawsuits against the business; fail to collect money from debtors, the business will be cash starved.

With this said, a business needs adequate attention as much as yourself. Always ensure that you prepare financial statements and critically analyse the figures.

If you see a lot of personal withdrawals which are not business related, then quickly correct that error before it will soon go out of hand. If you struggle to separate business and personal expenditure, you may consider hiring a finance person to assist.

Hiring and then listening to the finance person’s advice may be a different thing.

Some business owners are stubborn and they may choose not to take advice from the financial person, but this advice may actually save and protect the business.

Having someone who knows the ins and outs of your business’ finances is critical.

Not only will an expert help you avoid cash flow problems, but you will have more time to dedicate to other aspects of your business.

However, never turn control of your books over to someone else entirely. It is fine, even prudent, to have a finance expert manage your books, but you need to retain an intimate knowledge of your business’ financial doings.

Look after your business as it looks after you.

Taurai Changwa is a member of the Institute of Chartered Accountants of Zimbabwe and an estate administrator with vast experience in tax, accounting, audit and corporate governance issues. He is a director of Umar & Tach Advisory and writes in his personal capacity. Feedback: [email protected] and WhatsApp +263772374784

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