This warning was sounded on The Business Coach, the Standard Bank-sponsored series on SABC3 that was launched this month. The programme examines the challenges facing small business owners and provides guidance on how they can be avoided.
“Most small businesses begin with a big idea backed by high levels of enthusiasm and personal ambition. Personal funds are set aside and the business is established. Unfortunately, in the rush to get the new business started, the first mistake has already been made because the business owner is using his own personal bank account for both personal and business use,” says Clive Pintusewitz, Director of Small Enterprise and Enterprise Development at Standard Bank.
The first step must always be to open a separate business account and ensure that from day one a separation between business and personal finances is well defined. The reasons, says Mr Pintusewitz, are clear:
- The capital injected into the business can easily be assessed. This is even more important if the business is a partnership, as it assists in avoiding confusion about which partner’s funds are being allocated to what use.
- All costs can be allocated to a single business account, so it becomes much easier to keep a record of costs. The costs of, for example, ingredients, transport, electricity and rent are much easier to track and potential areas for savings can be quickly identified.
- Cash flow can be monitored effectively. Quite simply, if a business owner does not have a good grip on what money is coming in and what money is going out, they could face problems that include:
o Not being able to accurately work out the costs of providing a product or service;
o Not being able to develop an accurate operating profit margin and therefore pricing products or services on gut feel rather than on market-based information; and
o Because costing, profit margins and cash flow are not accurately predicted, one runs the real risk of using too much money for personal expenses, thereby reducing the funds available for the business to the point where it runs out of operating cash during busy periods.
- With a separate account, where care is taken to carefully work out costs and profit margins, provision can be made for some of the balance remaining to be paid into the owner’s personal account as a regular salary.
- When the business is running successfully, the use of a business account ensures that some profits can be retained in the account to fund future growth.
- Having a separate account for business transactions means that an owner has a clean record to give to his or her accountant at the end of the year.
- Tax calculations are simplified as all invoices, receipts and bank statements match the business account. There is no possibility of personal income being inadvertently included within business costs, increasing the risk of tax and other claims against the business.
- It is also possible, with a business account that is operating using appropriate accounting standards and documentation, for the owner to list initial capital provided as a director’s loan that the business can repay to the owner once the business is operating on a sound financial basis.
“Perhaps the most important reason for having a business account, however, is the perception it creates in the eyes of customers and suppliers. When they see that they are dealing with a registered business they know they are dealing with a professional,” says Mr Pintusewitz.
Standard Bank recently launched a drive into the small business market which addresses this challenge head-on, providing a holistic solution to assist any new business with affordable banking. The BizLaunch offer provides banking, accounting software, and access to affordable insurance, training and a point-of-sale device.