Grow your SME enterprise in 2016

The year 2015 has come and gone, hopefully with all its challenges. For those who have survived the vagaries of the economy and managed to start a business in 2015, here are a few tips on how the business can continue to grow in 2016.

by Clive Mphambela

As we have repeatedly discussed, starting a business is not easy, remaining in business after start-up is even more difficult and growing the business thereafter is an even bigger challenge. In the last instalment of articles in this series, we spoke about how SMEs can avoid “financial suicide”, as we recognised a few financial management errors that lead to the early demise of SME start-ups. Today’s article tries to articulate some more of the same issues that will help stop the early “death” of your SME business and position it for growth in the coming year.

First things first: know your customers

In coming up with your business, the first thing is to have a keen understanding of your market. Who are your customers? Where are they? How many are they? How will you reach out to them? This is what we have called “market research”. This step is critical from the very beginning and the SME owner must engage in this basic research before even venturing into business. Going into business without this kind of knowledge is akin to flying blind. The business will crash-land very fast.

Manage yourself

Secondly, once the business gets off the ground, don’t get over-excited too quickly and start changing your lifestyle as soon as the cash starts rolling in. That’s a recipe for disaster. Business requires patience and maintaining a cool, sober head. One of the biggest risks SMEs face is the risk of being bled to death by the business owner. The best way to manage yourself well is to always remember that the business and the owner are “two different entities”. Money that belongs to the business is not yours as the owner of the business, at least until you pay a dividend or draw a salary. It is, therefore, wise to delay drawing dividends early as this can drain business capital and derail the business. Rather as the owner, draw a decent salary that the business can afford. That salary should be sufficient compensation for the skills and time that you are investing in the business, while profits earned by the business should be retained for growth.

Minimise expenses

One of the most difficult things to do in business is to manage costs within sustainable limits. Just because you are generating cash does not mean you should spend it, especially on things that do not directly impact the business growth. Spend a dollar if that expenditure will result in more revenues coming in. In other words, stick to “business-relevant expenditures” and avoid spending money on things that the business does not need.

Keeping costs down also means you will hire only those employees necessary to run the business efficiently and look after customers well. Don’t go on a hiring spree so that you fill up the office or factory with people. Salaries and wages are always one of the biggest expenses in any business, big or small, so one should be absolutely careful here. Hire people that can do more than one task. for example, a receptionist who can also double up as telesales assistant or accounts clerk can be useful in the early stages of a business.

No lavish premises

Chose premises carefully, don’t go for the expensive real estate or prestigious location. Rather a practical low-cost office will do just fine. For some types of businesses you can start working from home to cut on rental costs at the start, and then look for appropriate space to rent as the business gains scale.

business records

Keep business records

How do you tell if your business is making a profit or a loss if you are not keeping any records? Most of our small business owners unfortunately perhaps take recordkeeping for granted, but it can make the difference between success and failure in business.

Develop the discipline of keeping track of all the sales, cash proceeds, and overall turnover of the business as well as other vital business records such as bank account statements, and so on.

Your business financial records will help you prepare financial statements that will become invaluable when you want to approach potential financiers or funders for the growth of your business. For example, credible financial records are required to support your business proposal when one approaches a bank to apply for a bank loan.

Have a banking relationship

Religiously operate a business bank account early in the life of the business. Where possible, bank all receipts and record all payments against your bank account. Your bank statements will provide potential lenders, (including your bank) a useful record of how your business has been running and will prove crucial in providing an insight into how it will run in future. Using a bank also ensures that you do not run your business from “your pocket” which generally leads to unnecessary expenditures.

Having a banker to rely on also gives you access to a sounding board as you can ask your banker to professionally advise you on how to run your finances. As already alluded to above, keep your personal bank account separate from the business account. This may seem to increase your costs in the short run, but the benefits will quickly outweigh the seeming inconvenience of going to the bank every day to bank your sales.

Avoid borrowing too early

Sometimes we are tempted to borrow very early in business to “expand” the business. This can be dangerous! Expanding too quickly may lead to “overtrading” where the business is growing faster than it should. In other words, the structures required for a certain level of business may not be in place and this can result in a quick and sudden death. Allow the business to expand at a sound pace and make sure all things are in place before tackling new customers or exploring a new market or idea.
Rather save a bit of cash and build up a cash reserve for a rainy day instead of jumping into debt. Borrowing too early also exposes the business owner as he/she is responsible for the debts if the business fails. When the time comes for the business to borrow, when it has been around for a while and you have gotten to understand your market, you can then approach your bank for a loan. Hopefully by that time you bank records will be showing a healthy trading pattern.

l Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on clive@baz.org.zw or on numbers 04-744686, 0772206913

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