One of the most daunting things in the business world is finding your way up the entrepreneurial ladder. Many aspects factor in when it comes to establishing discipline to follow when pushing your business to break even or achieve its expansion goals.
Picture this: A fashion stall operator in Nairobi CBD is struggling to raise money for rental space, has to meet her day-to-day needs at home, has to replenish the stock and find new customers while trying to satisfy her frequents ones.
On a dry day, she may be tempted to use her operations money to cater for her needs, with a rational intent 'refunding' back the business money when she gets it. Let's face it...she is under no obligation to do it. It'll be a miracle if that happens with the kind of economy we're in.
Running a successful business that will end up achieving excellent brand equity, become a household name that will command purchase is not an easy task.
Before your accrue assets to billions like Dangote or Apple, you need to know the secret to taking your startup, SME or FMCG enterprise to the next level. How do you save up your first million?
We had a chat with Chintan Thacker, MD, Vivek Group on how Kenyan entrepreneurs do exactly this.
You could be a farmer in Kitale or a self employed blogger and have longed for the moment your bank account will reflect 7 figures. This is how to go about it.
First of all, Mr. Chintan, you are a reputable business leader in the Kenyan manufacturing industry. How did you manage to acquire your first million?
My father launched Vivek in Kenya during my childhood and gave me so many insights, as I was growing up, into business and business opportunities. When I first had the chance to launch my own business lines, I was initially working in two small rooms in an industrial block, repackaging Over The Counter Pharma products with the brand name VIVEK, and satisfying orders for rapid deliveries from companies that needed sterile medical cleaning products. It was as we then moved into larger warehouse space and began the first stages of manufacturing with Private Label household cleaners that I made my first million. I didn’t notice, as such, because really everything was reinvested, as we moved into larger space again, and began developing a much wider range of Homecare & Aircare products with the brand name EZEE & AIROMA.
Sometimes as an entrepreneur, the money you are making barely enters your mind, because you are just, in your own mind, managing to raise the funds to make the next upgrade and the next upgrade. Then, suddenly, you turn around and that is when it strikes you that you have actually moved miles ahead, with major contracts and more than 100 employees: you just wake up one day, and you have created a business around you.
What are the major financial pitfalls that Kenyan entrepreneurs can look out for when scaling their businesses?
Don’t overstretch in trying to develop new products. As you create a small business that is succeeding, any next steps need to be funded in a way where it doesn’t matter if they succeed or fail, the original small piece of successful business will survive. Every business carries risks, and if you are going to grow rapidly you need to take risks, but take the risks with the funds that are for that, and don’t risk the whole business with each forwards step.
Another pitfall is making sure you have a way to cope with late payments form your customers. What will happen to your business if that next client takes 9 months to pay? Will it take you under? You have to watch your payments pipeline, or cashflow, not just your sales figure. After all, a sale isn’t really a sale until it has been paid for, and sometimes things can happen that make the journey to payment a very lone one indeed.
The final pitfall in scaling up is that you have an idea, you are sure it will work, but making a product isn’t the same as selling a product: by far the best way to scale up is to ensure you are making sales even as you go into production, and ideally before you ever do. Make sure you have a market, and better still, a contract, and then you are really onto better ground.
What are some of the key factors to consider when loaning for business expansion?
The first and foremost consideration is affordability. Interest rates can and do change. Will you be able to afford the loan repayments even if they double, from your existing business, if the expansion takes longer than planned, or the new sales pick up more slowly? Borrowing for expansion is the only really good reason to borrow, but you need to judge the risk so that it doesn’t ever threaten your existing business.
You MUST be sure your cashflow is good enough now to cover those loan repayments whatever happens, or you could end up taking your whole business down in this push for growth.
The next consideration, on deciding whether to proceed, is what we call the return on investment. Borrowing is expensive here in Kenya: how long will it take for the expansion to cover the cost of the loan, which is a cost, just like any other? If you are going to take on a cost like that, you need to be fairly sure of the demand, or market, and to have worked out your pricing in detail: is your product special enough to be sure of selling, and is there enough margin left after your direct costs to fully service the loan?
The time, resources, and borrowing costs mean you need to be very sure this particular expansion is worth the effort.
Finally, a key factor when borrowing is shopping around for the best loan terms. Rates remain high by global standards from Kenya’s mainstream commercial banks. Bigger businesses often now look at bonds instead, which are far more affordable as borrowing, and all the interest rate payments go straight to the consumers who have bought them. Others look at options for borrowing abroad, although this has become increasingly difficult as the foreign financial banks and institutions have become more nervous about risk. Another route is through investment funds designed to promote African business, either through loans or equity stakes, or, more locally, for many smaller businesses, through Saccos.
In the end, it’s important to understand that all loans are not built the same and shop around for the best terms, and to ensure that servicing that loan will be affordable across a wide range of unforeseen circumstances: that way you will get your expansion at the end, and success will be yours.
Speaking of business expansion, one needs strategic partners with an aligned vision and passion. What are the other factors that an entrepreneur should consider when bringing on board a partner as he or she targets a million shillings?
You really need to have shared vision and goals with any partner. Even if they bring to the table a billion shillings, if you don’t share the same idea about where you are trying to get to, and why, you won’t get far.
You also need mutual respect between the two of you: a situation where you both believe in each other’s abilities and value one another’s inputs. Anything less than the shared belief that together your idea is more, or better, will lead to later fractures.
Another important thing to look out for is how hard your partner works, do they work as hard as you do: they should be putting in and even pushing you to do the same to make sure your joint project is successful. And how do they respond to feedback and criticism?
The truth is that the vast majority of businesses fail, so anyone who is going to achieve a successful business project - alone, or as your partner - needs to be able to listen, to hear, to respond and to adapt. A fixed approach, regardless of all inputs, can end up being a failure.
The communication between the two of you also needs to be very good indeed. You can’t replicate each other’s work, or instruct people in different directions. For your growth and movement to be coordinated and smooth, you will find that the two of you need to be talking all the time, with enthusiasm and naturally: then you will be working as partners.
Finally, it also helps if your partner has strong networks. If they have a good rapport with others, lots of connections that will help with the new project and a wealth of experience, all of this will make the partnership a better path than going alone.
Are there any initiatives that you have been involved in that mentor entrepreneurs on financial success?
I am developing a mentorship programme for young entrepreneurs: but let me announce that at launch, and we shall certainly invite you to come and look at how it is structured and what we are doing as we roll out that programme.