Would you like to know the common reasons why a lot of start up or first-time businesses and/or business people fail?
The answer is simple: Because they do not know, and hence not applied, the Separate Entity Concept in business.
What is the Separate Entity Concept?
It means that the business is separate and distinct from the owner.
This is primarily an accounting concept which emphasizes the importance of proper records keeping. It means maintaining accurate books of account.
BUT, for me, there’s more to this than just an accounting concept. It is a very important principle when it comes to small business management. It’s more about not mixing business money with personal money.
Here’s an example:
If the business owner or owners (if there’s more than one owner) put money into the business, it is recorded in the business books as Capital Contribution. If the same owners withdraw money from the business, it is recorded in the books as Withdrawal; and this does not happen very often.
Unfortunately, many owners of start up and small businesses (by this I mean owners of Sari Sari stores, Carenderia’s, Bakeries, Gapamaligya og Turon and Tinuhog Saging) fail to understand this concept. So what usually happens is that business owners spend business money for their private and/or personal expenditures.
For example, many small business owners, like Sari Sari store owners, get stocks from their inventory for personal consumption. Imagine this scenario:
Anak: ‘Nay, wala nay shampoo!
Mama: Pagkuha lang sa baligya sa tindahan!
Imagine this scenario happening everyday; and add to that the occasional tinapa or sardinas, the coke, and the noodles. Have you noticed that more often than not, the Sari Sari Store, in no time, becomes Sira Sira Store?
This is also true with most Carenderia business; the owners would say “namaligya bitaw ko’g sud-an aron malibre na among kaon” … What happens is that ultimately, even the Capital is consumed by the owners, and there’s not any money left to “roll”.
So what’s the point here?
To succeed in any small business endeavor, the solution is simple: if you need to spend for your personal needs, spend only a portion of your PROFIT; never your capital!
For this to happen, it is essential that you know where you stand financially as a business entity. This is where records keeping plays a major role. If you keep a good record of all your business transactions, you will be able to evaluate whether your business is operating at a profit or loss.
So how about if the business is “very small”?; one that is not even registered yet with the City Mayor’s office? Will it need books of accounts?
My answer is yes! The books may not be similar to those maintained by big, established business, but records keeping is crucial to all types of businesses – that is, if you want your business to succeed. A simple notebook will do; and this is what you should do:
Record how much your initial capital is. Record all your expenses (only business related expenses). Record all sales transaction for the day. When you close shop at the end of the day, review your record and make a summary. How much did you earn (Sales)? How much did you spend (Expenses) – remember, all these should be business-related.
All personal transactions should be written in a separate notebook. With this record, you’ll know whether you’re spending within your means or way beyond your means.
Ideally, at the end of the day, your capital should be intact. You also know how much profit you made from the day’s transaction. Then, from your profit for the day’s operation, you get a portion of it for your personal needs and a portion to be infused as additional capital. If you follow this practice on a daily basis, in no time your business will grow big.
But what if after looking at your books your realize you are not making enough profit? What should you do? Look again, and look closely. Look for areas that you can save money. Are there expenses that you can eliminate? Study your competitors; can you increase your selling price and still remain competitive? Think of marketing strategies than you can do to improve your sales.
Thus, the question is this: are you willing to do what it takes to succeed in business? Are you willing to make the necessary changes (personal and business related) so that your business will have the chance to grow?