Making your biz a profit centre
- Details
- Category: SME toolkit
- Written by Bridget Olotu
- Hits: 1242
I was talking with a client lately on the financial returns on his seafood business. After analysing his financial projections for the business, I was more concerned with the margins he is supposed to be making. He sounded very visionary with his plan to capture 75% of the existing market in his industry. He expressed his long-term desire to build a strong and very competitive business that would provide consumers with hygienically packed, chaff-free and better-tasting seafood products. He articulated his plans to dominate the market with his products by putting in place an aggressive and comprehensive promotional plan to penetrate his prospective market segments. Nevertheless, like most SMEs or MSMEs, he failed to reason out how he could and would maximise the returns to his business. May be initially he was so carried away by the business concept that he forgot that any business concept that lacks profit concept has no future prospects. Even in non-governmental organisations that are not-for-profits, the effective and successful ones have “surpluses” which are used for promoting key projects or social objectives of the organisation. Profit therefore remains one way by which the success or optimal performance of an organisation within the capitalist or liberal economic system is measured. Back to my story, my client had calculated a 10% margin on each product he was going to be selling and for me that was quite uncomfortable. I expected that the margins should not be less than 30% on each product to take care of the running expenses of the business and leave some good profit for my client.
We discussed on the options he had and I made him see the need for us to adopt some cost-cutting measures to enhance the profit potentials of the business. The fact my client overlooked, like many entrepreneurs do, was to think that as long as there was a difference in the selling price from the cost price, the business was profitable. But that is absolutely wrong. The business must be deemed not only profitable but to be profitable enough to cancel out piled up expenses and obligations and to leave enough behind for the reward of all stakeholders and enough to reinvest into the business for growth and expansion purposes.
Now, I know very well that the reason for being in business may not be profit-motivated, but there’s no way any serious-looking business owner can build his/her business by ignoring the fact that the business needs to stay solvent. In business, cash is king. But while the last sentence may be true, there is a truer fact that “it takes cash to run the business; but it takes profit to keep the business going.” Every going concern needs profit to stay afloat. Let’s say you start out in business with N50,000 as capital. If the business fails to make profit, and the owner continues to pay for overheads (expenses) to run the business, very soon, the expenses will cancel out that initial capital unless a fresh injection of funds is made.
While I agree that this discussion may not be necessary because many of us know that profit is important in business, I am saddened by the fact that many business owners, so to speak, by their daily actions and business decisions, are living out this axiom in the contrary. Take for instance, you go to our local markets and you see many of our traders, MSME and SME owners sell wares that ordinarily does not cover their expenses, let alone make for them any form of profit. Such businesses continue in the daily grind of putting up a presence in the market but having nothing to show for the owner at the end of the day, week, month or year. You see some traders, for instance, selling low margin products like razor blades, chewing sticks, sweets and confectioneries in our markets. And every day this fellow peddles his/her wares around or stays on one spot and expects to make something “magical” out of the business. It would have been better for such people to get some form of employment to escape their financial misery. Instead of putting up with a business that barely makes them N300 a day, they could go wash plates in some local restaurant where they could be paid N500 a day with 2 to 3 free meals and some tips in some instances from some happy customers. There are three types of business owners and I’d like you to mirror your business in any of these.
1. The business owner who believes in business activity alone. Such fellows wake up every day, and go to some market to sell whatever they feel they could sell to people. There’s no vision, no plan, no anticipation of what customers want, no strategy on how to make a success of the business. Just plain activity. You don’t need a heavy dose of formal education to be a successful trader. You just need some form of business intelligence. The reason some Nigerian tribes are known to be great business people is because they are commerce-driven. They spot needs and start off their business adventure with whatever they can afford, while growing that little enterprise with the hope to branch off someday into that dream business. Alhaji Dangote caught that vision and today he is, presumably, the only black African on the Forbes 500 list of richest men in the world. Business owners in this category don’t care whether they are making profit or not. All they care about is that they are busy and active. They wake up every day to sell something. They never take time to ask themselves whether the business is worth their time, whether it is making enough money for them to cover their expenses, whether it can improve their lifestyle and standard of living, and whether it can help them achieve their long-term business and financial vision, etc. Such business owners sadly don’t have any future in business. They are better off as some other people’s employees.
2. The business owner who believes in general profit. Now this group of business owners believe that the business is supposed to make some profit. For them, so long as the selling price exceeds the cost price, the business is profitable. They do not figure out that the difference between your selling price from cost price is not profit but contribution. For example, Adamu sells second-hand cars. His last sale was N350,000. He bought the Golf for N200,000 and made slight repairs of about N50,000. The difference between what he paid for the car plus the repairs done and the price he sold it for is N100,000. You would say “whoopee!”But wait a minute. If that is the only sale he makes for a month, then think again. He pays rent on his car shop, insurance and administrative expenses, and he needs to pay himself and still leave something for the business. If these other costs swallow up the N100,000, then the business is good but not profitable.
3. The business owner whose business decisions are based on value and profit creation for all stakeholders. This group of business owners base their business vision and decisions on value and profit creation for all stakeholders. In other words, whether in Yankura market in Kano or Balogun market in Lagos or Ariaria market in Aba, their business decision is driven by the needs of customers, access to market, volume transactions and creative reduction of operational costs in order to create more profit for investors, employees, suppliers, customers, government and its agents, and for others. This group does not just engage in business activities; their business decisions are informed by the need for creativity, productivity and profitability in product/service delivery.
(Concluded next week)
Making your biz a profit centre
Category: SME toolkit Written by Bridget Olotu Hits: 1242
I was talking with a client lately on the financial returns on his seafood business. After analysing his financial projections for the business, I was more concerned with the margins he is supposed to be making. He sounded very visionary with his plan to capture 75% of the existing market in his industry. He expressed his long-term desire to build a strong and very competitive business that would provide consumers with hygienically packed, chaff-free and better-tasting seafood products. He articulated his plans to dominate the market with his products by putting in place an aggressive and comprehensive promotional plan to penetrate his prospective market segments. Nevertheless, like most SMEs or MSMEs, he failed to reason out how he could and would maximise the returns to his business. May be initially he was so carried away by the business concept that he forgot that any business concept that lacks profit concept has no future prospects. Even in non-governmental organisations that are not-for-profits, the effective and successful ones have “surpluses” which are used for promoting key projects or social objectives of the organisation. Profit therefore remains one way by which the success or optimal performance of an organisation within the capitalist or liberal economic system is measured. Back to my story, my client had calculated a 10% margin on each product he was going to be selling and for me that was quite uncomfortable. I expected that the margins should not be less than 30% on each product to take care of the running expenses of the business and leave some good profit for my client.
We discussed on the options he had and I made him see the need for us to adopt some cost-cutting measures to enhance the profit potentials of the business. The fact my client overlooked, like many entrepreneurs do, was to think that as long as there was a difference in the selling price from the cost price, the business was profitable. But that is absolutely wrong. The business must be deemed not only profitable but to be profitable enough to cancel out piled up expenses and obligations and to leave enough behind for the reward of all stakeholders and enough to reinvest into the business for growth and expansion purposes.
Now, I know very well that the reason for being in business may not be profit-motivated, but there’s no way any serious-looking business owner can build his/her business by ignoring the fact that the business needs to stay solvent. In business, cash is king. But while the last sentence may be true, there is a truer fact that “it takes cash to run the business; but it takes profit to keep the business going.” Every going concern needs profit to stay afloat. Let’s say you start out in business with N50,000 as capital. If the business fails to make profit, and the owner continues to pay for overheads (expenses) to run the business, very soon, the expenses will cancel out that initial capital unless a fresh injection of funds is made.
While I agree that this discussion may not be necessary because many of us know that profit is important in business, I am saddened by the fact that many business owners, so to speak, by their daily actions and business decisions, are living out this axiom in the contrary. Take for instance, you go to our local markets and you see many of our traders, MSME and SME owners sell wares that ordinarily does not cover their expenses, let alone make for them any form of profit. Such businesses continue in the daily grind of putting up a presence in the market but having nothing to show for the owner at the end of the day, week, month or year. You see some traders, for instance, selling low margin products like razor blades, chewing sticks, sweets and confectioneries in our markets. And every day this fellow peddles his/her wares around or stays on one spot and expects to make something “magical” out of the business. It would have been better for such people to get some form of employment to escape their financial misery. Instead of putting up with a business that barely makes them N300 a day, they could go wash plates in some local restaurant where they could be paid N500 a day with 2 to 3 free meals and some tips in some instances from some happy customers. There are three types of business owners and I’d like you to mirror your business in any of these.
1. The business owner who believes in business activity alone. Such fellows wake up every day, and go to some market to sell whatever they feel they could sell to people. There’s no vision, no plan, no anticipation of what customers want, no strategy on how to make a success of the business. Just plain activity. You don’t need a heavy dose of formal education to be a successful trader. You just need some form of business intelligence. The reason some Nigerian tribes are known to be great business people is because they are commerce-driven. They spot needs and start off their business adventure with whatever they can afford, while growing that little enterprise with the hope to branch off someday into that dream business. Alhaji Dangote caught that vision and today he is, presumably, the only black African on the Forbes 500 list of richest men in the world. Business owners in this category don’t care whether they are making profit or not. All they care about is that they are busy and active. They wake up every day to sell something. They never take time to ask themselves whether the business is worth their time, whether it is making enough money for them to cover their expenses, whether it can improve their lifestyle and standard of living, and whether it can help them achieve their long-term business and financial vision, etc. Such business owners sadly don’t have any future in business. They are better off as some other people’s employees.
2. The business owner who believes in general profit. Now this group of business owners believe that the business is supposed to make some profit. For them, so long as the selling price exceeds the cost price, the business is profitable. They do not figure out that the difference between your selling price from cost price is not profit but contribution. For example, Adamu sells second-hand cars. His last sale was N350,000. He bought the Golf for N200,000 and made slight repairs of about N50,000. The difference between what he paid for the car plus the repairs done and the price he sold it for is N100,000. You would say “whoopee!”But wait a minute. If that is the only sale he makes for a month, then think again. He pays rent on his car shop, insurance and administrative expenses, and he needs to pay himself and still leave something for the business. If these other costs swallow up the N100,000, then the business is good but not profitable.
3. The business owner whose business decisions are based on value and profit creation for all stakeholders. This group of business owners base their business vision and decisions on value and profit creation for all stakeholders. In other words, whether in Yankura market in Kano or Balogun market in Lagos or Ariaria market in Aba, their business decision is driven by the needs of customers, access to market, volume transactions and creative reduction of operational costs in order to create more profit for investors, employees, suppliers, customers, government and its agents, and for others. This group does not just engage in business activities; their business decisions are informed by the need for creativity, productivity and profitability in product/service delivery.
(Concluded next week)