I wrote this post sometime ago and I thought I should share due to the recognition it got on linkedin.
This post talks about how entrepreneurs can easily loose their due to cost mismanagement.
Manage your cost or cost your investment digs deep into the importance of controlling cost during start-up. Cost mismanagement is one of the most daring factors that have denied many start-ups daylight.
With the excitements, motivation and a vision of one’s objective for quitting his/her job to build his/her own, cost management is one thing that has in most situations not had a fair share of the excitement and passion. Little attention is given to ‘little’ spending as most people call them during start-ups.
The importance of cost classification and control can’t be overlooked, not even by established organizations. Effective decisions making processes by the giants gives significant importance to cost no matter how little. In evaluating alternatives in decision making, all possible solutions are quantified in monetary terms for analysis and the most cost-effective is chosen.
Well to be fair, but not creating a yardstick not to consider cost, the young man or woman very passionate about his/her dream might not fully understand the need for detail cost management. This, however, has cost much vibrant entrepreneurship to fall after great starts.
The thoughts of cost mismanagement are mostly related to buying or paying the inappropriate amounts for goods or services acquired. In as much us this is true, the start-up cost mismanagement rather roots from different sources. These include but not limited to
The causes of cost mismanagement in starting up
The entrepreneur's picture of his/her dream.
I have had an encounter with an entrepreneur who saw his business like a multimillion dollar company that he visited once. He tried to start his company like one, typically ignoring the fact that these companies did not start that way. At the end of the day, he had a well-finished office, 8 staff but no work for them to do. The business collapses after four months of operation due to the high cost of labor, rent, and expenses.
This is a typical story of how start-ups can easily mismanage cost. For the fact that you see your dream’s likeness to an already existing company does not give it the strength of that company. Of cause, over time your dream could become like the big company but, there is a time hurdle which you would have to jump. Start small is a song almost every consultant will sing for a start-up. If even you had the money to throw away, it’s still good to start small just so you can learn to match cost with productivity and demand.
Lack of research
Before you manage something, you would have to know at least the basics about it. Once we get our idea and the resources to get started, little do we care, after all, whatever comes we will be ready to face it fair and square. This is very wrong in starting a business as what is coming will be coming for your investment.
What proper research will do is save us money and time. During your research, you would have found out what the best alternatives are, what the best practices are, and when it’s most appropriate to start what. This is the heart of cost management. If the right decisions are made, the right amounts of money will be paid.
Investigation before starting up usually does not mean going to big companies in your industry to look at the way they do things. Your investigation should be about getting as information about management, accounting, and marketing as possible. Even the smallest information gathered from this research can bring a huge impact in your decision making.
Underrating the impact of detail accounting for ‘minor’ spending
The killer expenditure is one that you deem not big enough to be recorded. If any spending was ever small enough not to be counted, then big companies won’t keep petty cash books. As small as they may be, they have an impact on your total financial standing and the total effectiveness of your decisions. Every decision that you make as an entrepreneur either adds or subtracts from your investment and so is your expenses.
They are hard to collect, record and keep that’s true but the most who make it as entrepreneurs are the once that have taken the pain to keep them. I don’t know if you have experienced the saying that “accountants are stingy people”? This because every cedi or cent that you take from him, he will ask you to account and defend it. That is cost control at its best. But as start-ups, these are usually very easy to ignore.
Inability to effectively classify cost
The ability to effectively charge the cost to productivity is one sure way to avoid mismanaging costs. If activities that generate cost are undercharged or overcharged, the likely outcome is either an overestimated profits or underestimated loss.
In simple terms, what this means is that whenever small expenditures are made and are not recorded, at the end of the day the profit or loss on that project for which the spending was made will be either over calculated or under-calculated by the amount of the spending.
This will lead to a final profit or loss at the end of a quarter or year that will not truly represent the actual state of the business. Don’t assume so far us its one company, they cost will still cancel out during the preparation of the financial statement if even you didn’t classify them properly. This because different decisions are made for each project or activity and over/understating its cost can have a greater impact.
This is a link to the original post that i posted on linkedin
https://www.linkedin.com/pulse/manage-your-cost-investment-yembilla-foster/