8 Major Causes Of Poor Financial Management In Business

Share

There are many causes of poor financial management in business.

Researches have revealed that business owners  are themselves responsible for poor financial management.

You can actually  prevent poor financial management if you can take the pain to understand the nature of money and its management.

In this article, therefore, attention is focused on the most common causes of poor financial management.

It has also suggested  some actionable steps you can take to prevent improper financial management.

Lack of accountability

Lack of accountability is one of the commonest causes of poor financial management in business.

For example, you should not feel that you:

  • Are not financially accountable to anyone
  • Own the business
  • Have absolute control of the finances of the business.
  • Will dictate what will happen in the business.

Unfortunately, there have been many instances where some employees, including accountants, have been fired for giving their employers suggestions on how  to manage the finances of their businesses.

This reminds me of an incident in which an employer asked his accountant, “if you are so knowledgeable about money why are you still  working for someone instead of having your own business”?

Consequently, because they do not want to take advice from any person, they end up with poor financial management.

Authoritative tendencies by business owners

Many business owners do not give their employees opportunities to use their financial skills to help them succeed in their businesses.

Moreover, some business owners are also do not believe that some of their employees can make any meaningful impact on the success of their businesses.

For instance, some business owners employ accountants, give them large tables in well furnished offices but without authority to make even minor decisions when doing their jobs.

In particular, many business owners do not know that their employees, such as  accountants, can be great assets to their businesses.

In the same vein, they do not know or believe that an accountant can be very helpful when:

  • Doing costs and benefits analysis
  • Making business expansions
  • Diversifying into other businesses
  • Making investment decisions

Because of their pride, they miss out from  the skills and talents of their employees.

Causes Of Poor Financial Management: Lack of financial discipline

Lack of financial discipline has been linked to poor financial management.

Here again, the business owners are themselves the culprits.

For instance, I know a business owner who does not know how to say no to invitations.

He jumps at every invitation wherever and whenever it is happening.

He does not ask himself “If I turn down or accept this invitation what do I stand to gain or loose”?

Worst still, he splashed business finance at every party he attended so that people can know that he rich.

To him, “the accountant is to be seen but not to be heard”.

Improper Financial decisions

Improper financial decisions are decisions that are not based on valid assumptions or verifiable data.

Some business owners simply make financial decisions without:

  • Analyzing the decisions they want to make
  • Evaluating the risks inherent in the process
  • Doing costs and benefits associated with their decisions.

Furthermore, many business owners do not seek advice, hold meetings or brainstorm with their senior employees when making major financial decisions.

Consequently, they make financial decisions alone without input from anybody.

Unfortunately, some of them end up making faulty financial decisions that eventually wreck their businesses.

Causes of poor financial management: Lack of Budgeting

According to Benjamin Franklin “if you fail to plan, you are planning to fail”.

Budgeting is one idea many business owners do not want to listen to.

As a result, if an employee brings up the idea of budgeting, they see the employee as dictating to them what to do in their businesses.

After all, the business and the money belongs to them!

Regrettably, many of the business owners are educated and knowledgeable enough to know that budgeting can help them to run their businesses in a more responsible manner.

In fact, some business owners think, and for wrong reasons, that their businesses are too small and so do not need to prepare financial budgets to capture their income and expenses.

Furthermore, they do not know that budget can be a road map for effective management of business finances.

Lack of due diligence

Lack of due diligence before parting with money is one sign of poor financial management.

Best financial management practices require that you do a number of researches, asking questions and getting answers before you make a major financial decision.

I know a wealthy man who invested a huge sum  of money in the shares of a company that has never paid dividends for over two decades.

As a matter of fact, that company has long gone under and is unable to pay off its debts to creditors.

But for the limited liability clause in the Company and Allied Matters Act, he would have been required to bring in more money to pay off the company’s debts.

So his losses were limited to the value of his investment in the ordinary shares of the company.

Causes of poor financial management: Hasty decisions

Hasty financial decisions can lead to unexpected results in business.

In other words, there is a relationship between hasty decisions and poor financial management.

Some business owners simply jump into decisions without consulting or seeking advice from people who have been there before them.

Beyond that, you should remember that cash is key to success in business.

This means that there is every need for you to weight every option available to you before you make financial decisions.

You should also remember that if you make a costly financial mistake, you can hurt your business.

And you can loose your investments. When this happens, you will, of course, be on your own.

Mixing business expenses with personal expenses

Mixing your personal expenses with business expenses is an evidence of poor financial management.

The reason is that you can run down your personal account and even go ahead to spend business money for your own purposes.

Besides, if you mix your personal expenses with business, you can never know the direction your business is going; whether it is making profits or not.

In conclusion, you should key into the idea preparing cash budgets to avoid poor financial management.

Related: 10 Ways Poor Financial Management Can Hurt Your Business

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
View all posts by Samuel Ijenhi →

Leave a Reply