Have the audacity to set targets that spur profits
By Waithaka Gatumia
Sometimes you have to be brutally honest to help people wake up and smell the coffee.
Talking to a couple who are business partners, I decided to cut the chase. “You are not running a business,” I said, “This is a hobby, which is why you are getting frustrated.”
The partners, a husband and wife had approached me after I spoke at a seminar last weekend. The wife was employed and funding a hardware store the husband was running. “How long can I continue to put money into this business without seeing returns?” She thundered in desperation. He was also frustrated. “If we don’t invest enough it doesn’t matter how long you wait, you have to spend money to make money.”
He had found a supplier in Taiwan who was selling quality motorbike spare parts at a reasonable price. He gave an example of inner tubes. “I import them at 300 shillings a piece and sell them at 700 shillings. This is more than 100 per cent profit and I am still cheaper than my competitors down the street who are selling at Sh800 a piece. It’s the same with most products I sell.”
“So what’s the problem?”He told me that most months he wouldn’t have enough money to pay himself. “How is that possible?” I asked.
“You see with the good prices I often run out of stock mid-month. This is why I have been telling my wife that we need to invest a little more so that there is enough stock to take us to the end of the month and make even more money.” She quickly jumped in, “For how long? How long am I going to keep putting money into this business without a return? Six months? A year!?”
“Why don’t you use the cash from the sales you are making to restock the shop?” I asked. “Oh, most of it is used to pay rent and salaries for my two clerks.” He said. “And your salary as well, right?” I asked. “Ha! Salary? What salary? This is a small business, I only have something for myself when we make a profit on a good month.” “And what do you consider a good month?” I asked. “When we make enough profit.” He said. “Do you have targets?” I asked. “No. This is a small business. We just sell as much as we can.” He responded.
At this point, I realised they were not running a business at all. They did not understand the difference between gross and net profit because they had failed to account for all costs such as rent and a salary for the husband. Net profit should be calculated monthly after accounting for all costs of running the business. The second and more serious issue is that they had no targets. They did not sit down and decide how much they would like to make from this business. Without targets, there is no pressure to achieve the goals that will allow them to make net profits while paying the husband a salary.
The writer is Centonomy Ltd chief executive