“I have a challenging situation. I have no cash flow and as a result my business is under pressure. I am struggling to raise capital to inject into marketing of my business and I am not able to grow and employ staff,” says James.
Thabo has a small business in Naturena called Cape Cookies which buys biscuits to repackage and sell. Although he has been running the business since 2008 he is struggling to grow it into a sustainable entity.
“I sometimes have to spend family money to pay the suppliers and I am also using the business money for transportation and buying food during the month and sometimes paying the school fees,” says Thabo. “I understand that I have an administration problem but how to I fix this? I want to move forward in order to grow my project because I have a vision and am passionate about it”.
Riana Grobler, Senior Marketing Consultant for small businesses at Old Mutual Corporate says both of these readers have a similar problem to many small business owners – they are not keeping their personal and business finances separate. “They are using money from the business for household use and this has a direct implication on their cash flow,” says Grobler.
Grobler says if you are going to run a business you need to have a proper budget in place and have separate accounts. Money that is earned by the business must be re-invested in the business.
The starting point is to do a proper business plan so that you understand your break-even point. “A break-even point is how much money you need to make in your business in order to cover your business expenses. Neither James or Thabo had any idea how much money they had to make in order for their business to be profitable,” says Grobler.
In order to calculate a break-even point you have to include all the costs associated with the business including electricity, transport costs, telephone and office rental.(see side bar: Thabo’s Budget).
In a break-even analysis you also need to include a basic salary for yourself. If your business cannot pay for you to put food on the plate then you are not going to survive. It is very important that this salary is the only money that you take out of the business; do not be tempted to dip into the business funds if you have a short-fall one month. This will be to the business’s detriment.
Your business plan will also need to factor in cash-flow constraints. For example with an estate agent it may take up to three months for commission to be paid after a sale. James needs to have funds available to support him or another income stream.
“Both James and Thabo believed that they needed to put more money into their business for marketing, but that was not the problem, cash flow and budgeting is the problem” says Grobler who has advised and met many small business owners. “Many businesses have stunning ideas and a real passion to make it work, but the success all comes back to basic finances”.
The five Ps of a business plan
When starting a business Grobler says you need to consider the five P’s: Place, Product, Price, Promotion and People.
Place: Where do you need to work from? Do you need foot traffic? Where does your market live?
Product: Know what it is that you are selling and focus on it. For example James needs to decide what segment of the housing market he wants to target – is it townhouses or houses? You need to develop a niche and not be all things to all people.
Price: The price of your product must cover your costs and provide you with an income, but is the price you need to charge market related? Will people be prepared to pay that price? There is no point in starting a business where you are making a loss on the product. And never get involved in a price war to win customers – no small business can afford to do that. When calculating your price also factor in increases in input prices. If you know the electricity price is going to increase by 25% and you run a restaurant, you need to add that into your price so that you do not have to increase prices in the short-term and alienate your customers.
Promotion: How do you promote what you sell? Marketing costs can be kept very low and word of mouth can be very effective. James could advertise in local advertising booklets that are handed out freely to residents in the area for as little as R100 or print out flyers and drop them off at people’s homes rather than spending thousands on advertising in the community newspapers.
People: How will you pay the people working for you? Will you include family members? Will you bring in a partner who shares in the profit of the business rather than an employee that you pay? In the estate agency business for example one can hire people based on commission, so James will only have to pay his staff if their lead translates into a sale. Thabo could follow a similar model if he hires people to find new markets for his cookies – but he must factor this commission into his break-even point.
The purpose of a budget is to know what your expenses are and what your income is, so that you can determine whether you are running a profitable business.
Total Revenue (Sales): You need to make a list of the different cookies you are selling and at what price you are selling them for.
Total Cost of Sales: Make a list of what those cookies cost at the price you are buying them for.
Gross Profit: This is the difference between your total revenue and total cost.
Total Expenses: Make a list of all your Expenses with regard to the business. This may include the following:
- Salary expenses – e.g. the amount you are paying yourself from the business
- Delivery costs – e.g. what it costs you to deliver the cookies to your clients
- Telephone – e.g. calls made which the business must pay for
- Supplies – e.g. paper and pens for the office
- Travel expenses – e.g. travel to visit clients or to do marketing for the business.
NB: The Expenses are fixed expenses which you will have every month to enable you to run the business.
Net Profit: This is the amount you have left once you have deducted your total expenses from your gross profit. If your Net Profit is a minus figure it means that you are not making a profit from the business and that you have a serious cash flow problem.
There are ways to rectify this and turn your business around to one which makes a profit. In order to do so you need to keep track of everything you spend. (Remember to keep your business finances and your personal finances separate.) Then determine which of your expenses should be cut to the bone or eliminated to enable you to show a profit. The number of cookies you sell and your selling price are very important. You need to ensure that you don’t sell too little or at a too low price, or else you will not be able to cover your expenses and therefore will not show a profit. You should determine what the selling price of the cookies must be in order to cover your expenses. You need to keep your Net Profit in the business and not spend the money in your personal capacity, as you need this to be able to continue with the business and buy stock (cookies) to resell.
This article first appeared in City Press