In part one of this article, I identified five of the many reasons why start-ups, and SME’s fail. In this concluding part, I will like to focus on what small businesses can do to survive their early years and build lasting and sustainable businesses.
It is no longer news that Nigeria is in a recession. Businesses are going through some of the most turbulent periods in their existence with the effect of the recession biting harder than the global economic crisis of 2008. Companies are falling like a deck of cards; and even some big organisations which will hitherto have been deemed “too big to fail”, appear to be grasping at straws in an attempt to survive the recession. If it was difficult for small businesses to survive their early years in periods of economic boom, it is almost certain that they will struggle more during the recession.
What can small businesses do to survive these turbulent times?
Get a firm grip on your finances
Businesses are set up with a profit objective. Profit is earned when expenses are deducted from the revenue generated from a business. The term “finances” is generally used to describe how we manage money or resources that generate money. I want us to view the term “finances” from the standpoint of Revenue, Expenses, and Cash-flows.
To survive, start-ups and SMEs have to think deeply on the best ways to optimize the concepts aforementioned. Permit me to break down these concepts without sounding technical.
Revenue: Grow your sales at the right price!
This refers to the income or benefits a business generates from carrying out its normal activities during a specific period. For example a restaurant generates revenue from the sale of food and drinks, a shoemaker generates revenue from production or repairs of shoes, a tailor from the sewing of dresses etc.
The revenue a business generates has a direct relationship with the price of its goods or services. How small businesses price their goods and/or services will go a long way in helping them survive their early years or during a recession. There are many pricing strategies SMEs can adopt; but as a guide, I suggest that the price of goods and or services should always at least cover all costs plus a margin. This ensures you can continue carrying on your business activities. Please note that it is not advisable for businesses to engage in price-wars i.e. selling at a price lower than the market price to increase patronage.
Expenses: Keep your costs down!
An expense can be referred to as money spent or a cost incurred in the normal cause of a business activity which enables the business directly or indirectly generate revenue. Expenses are also referred to as costs. Expenses/Costs have different categorizations but always ultimately lead to an outflow from the business. I have defined profit as the deduction of expenses/costs from revenue; it is therefore safe to assume that the lower your expenses the more profitable a business can be.
A recession is normally characterized with higher than normal costs and sometimes limited disposable income. As such, small businesses should do everything within their powers to optimize costs. I have deliberately not used the word “reduce” costs, because cost reduction may sometimes be inimical to the survival of a business as it may lead to a reduction in quality. Cost optimization on the other hand ensures that quality is retained but at the best possible cost. The following tips can help SMEs optimize their expenses/costs.
- Keep a proper record of all expenses and pay particular attention to the cost type which takes out the most money.
- Always separate business expenses from personal expenses.
- Be financially responsible. Prepare an expense budget and measure how well you are performing against budget every week.
- Ensure your expenses are not growing faster than your revenue.
- Always seek to get the best deals from your suppliers or vendors
- Ensure that you have up to date market information on all your business expenses.
- Don’t spend on things that do not positively impact your sales.
Cash-flow: Cash is King!
There is the classic saying that “Cash is King”. Cash is the life of a business. It works like the heart in the human body. Once the heart stops beating, a person dies because blood supply to the body ceases. The same applies to business. The absence of cash in a business especially start-up’s and SME’s is akin to the absence of a beating heart in the human body.
Cash flow is the money that comes in and goes out of a company. It is the generation of income and the payment of expenses.
Cash inflows result from either the generation of revenue through the selling of goods and services, money borrowed, or money earned through investments. Cash outflow, on the other hand, refers to money that leaves the organization for the payment of expenses, acquisition of assets or settlement of business obligations.
When the cash that comes into the company is more than the cash that leaves, then a positive cash flow is experienced. The reverse experience is called a negative cash flow.
For start-ups to survive, there must be a sustained period of positive cash flows. The following tips can help Start-ups and SMEs improve their cash flow management.
- Always ensure you invoice as and when due
- Delay expense payouts to a reasonable extent
- Ask your customers to pay faster
- Always monitor incoming cash and outgoing cash
- Seek favourable payment terms from vendors or suppliers
- Plan, plan and plan again
- Finance purchase orders
- Always ask for a deposit or milestone payment
- When demand for your product is high and your quality is unmatchable, consider a raise in prices
- Never have an idle cash balance. Where there is excess cash, place the cash in an interest yielding investment.
Validate your Business Model: Keep Creating and Delivering Value
The business environment is generally competitive and dynamic. It is always changing with new business models being tried and tested ever so often.
To survive the early years of a business and indeed a recession, SME and Start-up Managers must continuously engage in deep “soul searching” in which they will validate and re-validate their business models and approach to market.
A business model describes how organizations create, deliver, capture and retain value. Many organizations have failed because their understanding of the market they were playing in became obsolete and they could not create or deliver the value their market needed at a given time as their competitors did. While their business environment was changing, they remained fixated on their ways of doing things only to find themselves struggling not long after.
SMEs and Start-ups should always seek to improve on the value they create. Please remember that what people pay for as a good or service, has a direct relationship with the value they derive from it. An SME can validate its business model by:
- Engaging in discussions with like-minded people
- Spending quality time gathering and analysing information related to their industry
- Seeking new ways of improving their customer’s value perception for the right price.
The harsh economic clime has all it takes to make one give up on their businesses. The saying that “tough times don’t last but tough people do” is more relevant to Nigerian entrepreneurs than it has ever been. Those who can put in place structures and processes that will enable their business survive this whirlwind of economic uncertainties will smile in the long run.
Though I am very certain that as a nation we will hobble out of this recession, the reality is that many organizations especially Start-Ups and SMEs may find it hard to survive the harsh economic clime. It will be a tough ask but it is not an impossible task. The long term survival of the Nigerian economy depends on how SMEs grow and generate sustainable wealth for their stakeholders. If we as SME managers or Entrepreneurs do all we can to weather the storms, we may just be laying the foundation for that economic super power our dear nation Nigeria ought to be.
Photo Credit: Christopher Halloran | Dreamstime.com