MSME DIGEST With Kola Owolabi
REVERSE ENTREPRENEURSHIP Series (10)
Most of us would be aware of this statistic paraded in most business books: Only about 10% -20% of businesses survive within their fifth year of establishment. That is, out of every ten businesses started at any point in time, only one or two of them will still be alive and doing fine by the fifth year. The usual cause is that the business is not viable again or simply put, it is not making profit. It also means that the owners are spending more money than they make which translates to loss-making. At that point, if the company were to be operating with borrowed funds, no fund provider will be willing to advance more funds. What they will do is to try and see how to recover all or at least part of the money provided before the business dies a natural death.
This is what was about to happen to the business of a lady that met me at a business meeting. I was invited to talk to a group of business people and after my presentation, a lady that was running a school approached me asking for my assistance to help her get out of the difficult situation she found herself. She had a school in a Lagos surburb and she had been taking loans to keep the school going. At a time, one of the loans included one from a Microfinance Bank, financial institutions in Nigeria licensed to take care of needs of small and medium enterprises. Most of their loans are also far more expansive than loans given out by the conventional banks. This lady was not able to honour the terms of the loan and the Microfinance Bank, in desperation, threatened to close down the school altogether, maybe to auction off its properties in order for them to recover their money. I asked the lady to bring her financial records (mostly done in form of management accounts or income and expenses document). She couldn’t produce any credible document. I told her that I would not be able to assist her (she had asked me to assist in any way as a consultant to rescue her from the threat of the Microfinance Bank) if there we no financial records to refer to. I agreed to help her generate management accounts for about two financial periods, a step which helped me in finding out the true state of affairs of the business.
What I found out was a big shock to me. The assets position of the school did not reflect the quantum of the loans she had been collecting from people and financial institutions. She had obviously diverted the money to other uses. When I confronted her with the facts she admitted that she had used the money to take care of her family, to pay school fees and other non-business related issues. This brought a big dilemma. I told her that if I would be involved in helping her to manage the situation, I will have to impose some sanctions on her by way of how she would be spending any money coming into the business. My first reference was the salary payable to staff. I told her she had to put herself on a salary and I fixed a particular amount above which she was not allowed to go. She told me that the amount I recommended as her salary would be too small to meet her needs. I told her she had to compress all her needs within that amount or else she would not have any business again. Actually I told her I wasn’t going to continue with her if she was not going to follow what I told her.
This woman’s ordeal came simply due to lack of possession of good profit management skills, which is the act of controlling and minimizing expenses while still maintaining value that is required, in order for the business to remain profitable.
I will recommend the Chinese-style of market price-based costing in setting prices rather than the conventional style for the best profit management skills. The Chinese will fix the price they want to sell a particular product before they set out to find out the cost of constituent parts required for making that product. The price may be a fraction of what competitors sell their own. For example, they may decide to bring to the market at N2, 000 a product that others are selling for N10, 000. What a huge gap! How are they able to still get the same product out, probably with superior features and quality than existing ones? They then start looking at ways to find parts with costs and value that they will use for the product and after making it, the product will be sold and they will still remain profitable at the very low selling price that they have initially fixed. This is the epitome of profit management skills.
Kola Owolabi (08023203198)
Kola Owolabi is a Fellow of the Nigerian Institute of Management Consultants (FIMC.CMC) and Chief Executive Officer of David Solomon Consulting Limited, based in Igbesa, a suburb of metropolitan Lagos, in the vicinity of Crawford University. The company can be reached via phone or WhatsApp at 08023203198
