Business Finance: 4 Common Mistakes Women Entrepreneurs Make and How to Avoid or Overcome Them

It is no secret  that African women entrepreneurs have significantly less access to finance and without the necessary capital, women-owned enterprises struggle. We firmly believe good financial hygiene and habits can strengthen their odds of success in securing funding. In Part 2 of our series on business finance, we discuss some of the most common business mistakes we’ve identified that can negatively impact financial performance and how best to rectify them.

Mistake 1: Turning a blind eye to your finances

“I’m not good with numbers,” is a statement often uttered by women entrepreneurs, particularly when asked about their accounting or bookkeeping processes. We understand that numbers don't always come easily to everyone but it is critical to running your business in a fiscally responsible and sustainable way.

In an AWEC Live Session that she led on Financial Management for Entrepreneurs, Certified Public Accountant Sandra Johnson said, “Numbers tell the story of what has happened and what is currently happening in your business. Without them you pretty much have no business!” 

As the founder and CEO of her own accounting firm, Johnson CPA (U.S.), Sandra noticed a common thread among small business owners, particularly women: they often don’t link good financial processes with business sustainability. She explains, “The truth is, you are in business to make a profit! Whether you are a for-profit business or non-profit organization you need finances to pay bills, your employees and vendors, and also to reinvest money [into the business]. It is the only way to sustain it so it really is your responsibility as a business owner to pay attention to the numbers.”

Recognizing that your numbers are critical to your business performance and sustainability is the first step towards establishing good financial practices. How do you start the process? 

• Learn more about the numbers that are critical to the growth of your business. Financial literacy plays an important role because it provides the financial tools needed to make informed decisions, through the accurate understanding of business performance and company success. (One place to start is Part One of this series where we outlined the essential components of business finance that women entrepreneurs need to know.) 

• Get to know the three core financial statements that are used to evaluate a business:

  • The Balance Sheet:  A financial statement that summarizes a company's assets (what you own), liabilities (what you owe), and owner's investment (your stake in the business) at a specific point in time

  • Income Statement: Also referred to as the Profit and Loss Statement (P&L), this is a financial statement that measures a company's operating performance or profitability, by subtracting expenses from revenue.

  • Cash Flow Statement: A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) across operating, investing, and financing activities

• Establish the practice of analysing your cash flow regularly. The main reason a company will run out of money and eventually shut down is due to poor cash flow management or not looking regularly at the state of the company’s finances. To really understand how the business is doing financially, business owners review their financials monthly, or —if the business is struggling— weekly. 

• Consult financial professionals. While hiring an accountant will cost money, startups should consider their services as an investment, not simply an expense. For many SMEs, accountants are typically an external consultant, not a full time employee and their scope of work does not end with tax preparation; they can lend expertise and perspective in your industry to help your business grow and navigate through an uncertain economy. Accountants not only get to see the financial information of many businesses across a variety of industries, but they also have visibility into best practices that are working for other businesses, as well as the mistakes others have made that have led to failure. 

And, if we haven't already convinced you, one AWEC alumna recently shared that having strong accounting practices from the beginning showed her eventual investors that she was serious about building her business and made it easier for them to decide to fund her business.

Remember: Outsourcing a financial professional is certainly a smart and cost-effective way to keep an eye on the books but an external accountant or bookkeeper won't know the extent of the business like you do. Financial management responsibilities lie with everyone in the organization. 

Mistake 2: Not separating business from personal finances 

This is one of the most commonly cited mistakes among AWEC cohort members. As a business owner, it’s crucial to remember that your company is an independent entity; it’s free-standing from you and your personal finances. Therefore it is imperative for business owners to separate their personal and business finances. 

Using a business account to make and receive payments directly establishes a greater level of trust with suppliers and clients and it also streamlines your record keeping which makes it easier to identify. In addition to that a business is able to provide proof of business income to banking agencies thereby establishing business credit which is crucial to securing finance. 

If you don’t already have your personal and business finances separate, make the next point a priority: Register for a business bank account as soon as possible. This significantly raises the credibility of your business identity and is crucial if you are serious about building a reputable business or plan on raising capital to grow the business. (If for some reason this is not immediately possible then at least track shared expenses and keep receipts separate.) 

Mistake 3: Not keeping proper records

Part of the accounting process is to keep source documents that inform business owners about their numbers. Accounting Professor at Lagos School of Business, Dr. Francis Okoye, explained in a recent Live Session about financial statements that without adequate records, it would be impossible for a business owner to keep track of progress towards financial goals. The financial health of the business heavily relies on the company’s ability to keep records: “If you don't keep proper records, you may find yourself unable to explain where money is coming from or going to and why.” 

Your financial management relies on the quality of your records. Here are two simple ways to keep accurate and reliable books:

• Keep copies of all of your source documents. These include invoices, receipts, and proof of goods/services rendered. 

• Develop a system for tracking all business transactions. Dr. Francis mentioned that business owners need to categorize expenses and classify transactions. Entrepreneurs often make the mistake of using insufficient transaction descriptions. 

Remember: Every financial transaction that takes place in the company should be done so using the business account which then allows the business owner to reconcile the information with bank statements.

Mistake 4: Not Paying Yourself

When you're thinking about your business expenses, one of the easiest items to overlook is your own salary. Though a majority of small business owners take no salary at all, that doesn't mean you should forgo a salary for yourself.

Chartered accountant, banker, tax practitioner and managing partner at Valuecon Business Services, Abimbola Osuchukwu, says, “At the early stage of running a business, it may not be able to pay you what you are worth but it is important that you put yourself on a salary.” 

However, business owners who pay themselves indicate commitment in the eyes of their employees and investors. It proves that their own financial well-being depends on the financial success of your business’s success. It’s also one of the best ways to avoid spending business money for personal expenses.

How much to pay yourself depends largely on the stage of a business, its rate of growth, and levels of success. Increasing salary in step with company growth is often sound business practice. Two other things to keep in mind are:

• Start by paying yourself enough to get by or at least to pay for a modest amount of your personal expenses. 

• Project your future ideal salary. Plan for what you’d like to achieve in earnings by forecasting for it. You can do this by budgeting your full list of personal expenses including quarterly, semiannual and annual expenses to get a clear indication of the amount you need to be working towards.

Lots of entrepreneurs have made some or all of these mistakes on their journey to building their businesses. Being informed now can save you from facing irreversible outcomes in the future. The way you manage your business finance and try to avoid common small business mistakes will play a big role in whether your venture will be a success or not.