This being a subject matter that scares some of us it needs to be simplified.
That is for better understanding and application by our start-ups who are yet to grow for global dominance.
Especially for our home grown entrepreneurial businesses who are operating in a highly complex socio-economic environment. Where monetary and fiscal policies have cascaded down so fast to the households for them to make daily survival decisions.
Unlike before where almost everything was handled at a national level.
The impact is now too much for home-grown enterprises to copy with the ever-changing fixed and variable costs.
Our hope is to have business economics be part of elementary education so as to improve societal analysis for adaptation, quick and precise decision making.
It is in the viewpoint that costs related matters have been in the past treated as general part of bookkeeping just to sum up with revenues for an accounting profits.
Here we amplify our analysis of costs to be part of entrepreneurial business economics that results in prolonged growth.
- Entrepreneurial growth driven by operational costs
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There is a symbiotic relationship between average costs (summed fixed and variable costs in relation to output) and business growth to say.
It is in the interest of this edition that our entrepreneurial businesses should focus on economic business growth rather being general.
Those businesses that did not consider economic factors in their expansion have resulted in a scenario whereby running costs became way above the value of output (decreasing marginal returns to scale).
We then try to improve our appreciation of the subject matter through riding on an entrepreneurial growth that is driven by economic operational costs.
To start with as said in some previous editions there are two main periods in business growth that influence on the type of cost(s) to focus on.
That is the short-run and long-run period.
In both periods the costs of an entrepreneur should be well-analysed, determined and controlled.
It does not matter which sector your business belongs, these costs are inevitable and influence the anticipated growth and unexpected decline of production/processes.
In the short-run of an entrepreneurial business there is always a fixed factor that regulates production (that factor is amongst land, labour and capital).
Usually for our SMEs capital will be fixed and its associated costs become higher especially when there is no increase in production.
Therefore, for a business to take advantage of this fixed factor as aforementioned (not only referring to capital here but even land) it should produce more.
In the sense that with an increase in production there will be a spread of fixed costs to every unit produced resulting in what is economically referred to as a decrease in average fixed costs (AFC).
For instance the cost of rent will remain fixed whether the entrepreneur is producing at a full capacity, under-producing or not.
Therefore, there is always need to increase output produced/processed in order to spread the costs of rent or interest paid on borrowed capital and any other.
In most of our operating entrepreneurial producers and retailers as observed they are operating under capacity (whether in rented premises or self-owned).
I have seen some entrepreneurs who have waited until they were evicted from their rented premises by the owners yet they could have seen it before through engaging economic modelling for operational costs.
A closer look at your fixed factors and the costs associated can help to red flag when it will be time to expand production so as to cover for these before thinking about profits.
Some are repaying high interests of borrowed capital yet they could have resolved these through expanding their production. Introspect and adjust for the better or even refocus your business idea.
Then when the entrepreneur has managed to overcome chaos of being in the short run a focus on a bigger picture should then follow.
This is through inviting some systems and strategies for a whole-wide business growth specifying on the businesses’ marketing advantage, investor attractiveness and innovation (especially in Artificial Intelligence and repository/knowledge management for legacy).
We should take advantage of the continued reduction in the average costs (AC) of production through investing in those matters that improves our market/brand visibility for further growth.
That is investing in high qualified employees (escalates employee branding), advanced technologies (innovative brand), newer promotional methods (especially digitalised ones), research and development are some of the critical considerations.
These takes the business into a long-run where all the previous fixed factors together with their associated costs are almost totally eliminated through absorption.
To remind economies of scale are those advantages of growing big in a sustainable way.
Such that the costs of borrowing further capital will be cheaper since the business will not need any collateral as an expensive security needed when borrowing money.
The business will now be riding on its goodwill that came from being a giant in the market.
Also the business can even market itself without investing in some costly promotional tools and professional marketing agencies (becoming a popular brand through capacity).
The entrepreneur will then be able to get more discounts from buying raw materials in bulk.
Will shift from a business to customer model (B2C) to a business to business (B2B) with the latter having its advantage of dealing with huge, highly paying and prolonged orders from businesses rather than relying on individual walk-in customers.
This clearly shows that if operational costs are attended to and controlled the entrepreneurial business will endlessly achieve economies of scale together with the associated advantages.
The story does not end there since if by any mistake the business relaxes and fail to control its now huge capacity it might reverse the positive circuit to experience diseconomies of scale.
As witnesses by some of our promising SMEs who started mushrooming outlets, tuck-shops and opening other totally new lines of businesses which they could not further manage/control (both in terms of size and costs).
More will be discussed in the future for now let’s go back to the drawing board, reflect and act.
*Farai Chigora is a businessman and academic. He is the head of management and entrepreneurship at the Africa University’s College of Business, Peace, Leadership and Governance. His doctoral research focused on business administration (destination marketing and branding major, Ukzn, SA). He is into agribusiness and consults for many companies in Zimbabwe and Africa. He writes in his personal capacity and can be contacted for feedback and business at [email protected], www.fachip.co.zw, WhatsApp mobile: +263772886871.
