The Reasons Why You Can’t Afford to Pay Yourself a Salary at the End of the Month
By: Guest Thought Leader York Zucchi
This is an excerpt from the SME Insights series. The insights are based on the work done by SME Movement, which supports SMEs across 83 countries, with the majority being based on the African continent.
It sounds so easy and when looking at it from the outside, it seems like the most obvious thing to achieve when running your own business – at least that’s why we’ve all started this journey. But when we look a bit deeper and leave all the glorious success stories aside, we have found that a surprising number of SMEs have a way too high cash burn rate and face the ‘entrepreneur’s dilemma’ at the end of month. Most of the cash has been consumed by the business and the entrepreneur is facing private cash-flow challenges.
Anecdotal evidence suggests that this might be because of the understandingly optimistic character traits that entrepreneurs possess, hence the building of the company in anticipation of future revenue.
The profit last approach leaves the majority of business owners in a tough situation, trying to juggle private expenses with the cash that’s left out of the business at the end of the month
Cash flow challenges
Having a closer look at the underlying reasons, we’ve noticed that only a handful of SMEs really understand their cost structure, while the majority follow the traditional route of revenue – expenses = profit. Even though that might make sense from an accounting perspective, the profit last approach leaves the majority of business owners in a tough situation, trying to juggle private expenses with the cash that’s left out of the business at the end of the month.
The entrepreneurial paradigm that running your own business, results in an enormous amount of wealth, leaves a lot of entrepreneurs
crumbled, opening the flood gates for non ideal decisions in terms of generating cash-flow.
Most SMEs invest more money in getting a contract versus what it actually pays
No understanding of customer acquisition costs
We have also noticed that the majority of SMEs don’t know their customer acquisition costs and the related customer lifetime value. When asking how many meetings and business trips have been necessary to sign a deal, most of the times we receive a vague answer.
Taking life by the horns, looking deeper into the maths behind, we’ve learned that most SMEs invest more money in getting a contract versus what it actually pays.
It seems that entrepreneurs tend to work for free for their own company when it comes to client acquisition and aren’t bold enough to include their own reward into costing calculations.
Digging a bit deeper, we’ve found that especially smaller companies, where the owner has his/her head deep down in the daily business,
financial oversight and planning is coming too short. This leads to the common dilemma of the entrepreneur – taking what is left at the end of a month, instead of setting a decent reward as permanent monthly business expense, which is also part of the pricing calculation for the products and services offered.
We’ve experienced that the path to open an entrepreneurs eyes to their true financials is quite often a challenging one, but once the first steps are made, things flow much easier and the light at the end of the tunnel appears to be in reachable distance.