Understanding the Impact of Inadequate Financial Management
Inefficient financial management can stunt the growth of micro, small, and medium-sized enterprises (MSMEs), preventing cash flow, reinvestment, and increasing debt, potentially leading businesses to the brink of failure.
Consequences of Poor Financial Management
Josefina Mera, CEO of Conta MC, explains that poor financial management can lead MSMEs to accumulate debts, face cash flow issues, and make poor investments due to a lack of understanding of real financial numbers, resulting in suboptimal decision-making.
- Debt accumulation: Businesses may struggle with mounting debts due to poor financial management.
- Cash flow problems: Inadequate financial management can disrupt the smooth flow of cash within a business.
- Poor investments: Without accurate financial knowledge, businesses may make unwise investment decisions.
- Missed opportunities: Lack of financial planning can prevent MSMEs from securing deals with larger companies or accessing credit.
Insufficient financial planning is the primary reason MSMEs struggle to remain competitive in the market,” Mera comments.
Importance of Financial Planning
According to Mera, most businesses are created out of necessity and often lack financial planning. Entrepreneurs prioritize sales and operations, neglecting the financial health of their companies.
In Mexico, we’re accustomed to the ‘cochinito’ mentality – as long as the cochinito’s sounding, the business is doing well. But when faced with economic challenges or a pandemic, businesses crumble because they’re not prepared with enough cash flow to survive for three months,” she explains.
Juan Carlos Cruz, a lecturer at EBC, echoes this sentiment. He states that the prevalent ‘Dios proveerá’ (God will provide) mindset leads MSMEs to rely on their bank accounts without truly understanding their sales, customer relationships, or monthly performance.
They guide their decisions based on what they see in their accounts, but they don’t maintain proper records to determine if a month is successful or not. The only metric they consider is how much money is available to spend,” Cruz says.
Cruz recommends enhancing financial management training and leveraging technology to gain a clear, accurate understanding of business performance.
Proper financial control enables informed decisions for growth or timely corrective actions when a business faces challenging months,” he emphasizes.
Blending Personal and Business Finances
Both Mera and Cruz highlight a common mistake among MSMEs: commingling personal and business finances, especially since 90% of businesses are family-owned.
When you have a small, family-based structure, finances are often not separated, and the business becomes an extension of the family’s piggy bank. The issue is that a personal expense doesn’t generate additional value for the business,” Mera explains.
This practice can lead to confusion in assessing a business’s true financial standing, making it crucial for MSMEs to maintain separate accounts and avoid using business funds for personal expenses.
We’re so accustomed to cash flow ensuring our survival that we often neglect accounts payable, accounts receivable, inventories, and fixed assets,” Mera adds.
