How to Cut Risk of Business: Opening and running a new business is not for the faint of heart. New small and medium businesses fail at lightning speed across the world. In Kenya, data from the Small Business Administration shows that 1 out of every 5 businesses fail within the first year. Half of those that survive fail within the following five years. However, this high rate of failure should not discourage you from starting a small and profitable business. There are steps you can take that will help you minimize risk while starting any small business. Take a look:
1). Sales
This should be your primary focus within the first two years of your business. “The most important thing to do in a new business is focus on sales. Within the first 24 months, the sales you get will either validate your business concept and mode of operation or prove that you’re not in the right business,” says Kevin O’Leary, a prominent investor in the popular ABC investment show, Shark Tank. Within these 24 months, you must be ready to rethink your business concept and model. If the sales are bad despite doing everything right, put the business idea out and move on. “If customers are willing to spend money on your product or service, adjust your model and grow bigger,” says O’Leary.
2). The good and bad customers
Distinguishing between customers who are good for your businesses and those who aren’t is critical in the early stages of a startup. For example, customers who pay well and on time, but leave your workers feeling disillusioned, shamed and dishonored are bad for the business. This is because your business will only be as good as your employees. In addition, customers who always ask for the credit book can thin out your operating capital and cash flow. Angela Kariuki, a former banker and the founder and owner of Angie’s Closet, says that opening a credit book for customers was the biggest mistake she made when she first opened her clothing business. “A small scale retail business, especially one that deals with goods, requires you to keep your cash flow in check. I started sinking the minute I started releasing goods on credit or on partial payments,” she says. “Luckily, I learned my mistake fast enough and bounced out of it. My biggest fear was losing my long term clients, but that could not be compared to losing a business. Eventually, I closed the debt book and didn’t lose my clients as I had feared.”
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3). Loans
The majority of small businesses are never started with adequate capital. One of the mistakes you can make is to start raking in debts the new business cannot sustain. “I took a loan to start my first business, Fine Blendz. It turned out to be a huge mistake,” says Sammy Subu, the co-founder of online marketplace, Soko Huru. He says that taking a loan when a business is new will be similar to carrying dead weight on your shoulders. This is irrespective of whether it works or not. “Every month, you’ll be taking the much needed operational cash to pay your installments. If you must, take money from friends and family as seed capital rather than loans,” he says. You should only consider taking a business loan after you fully understand the dynamics of your business and competition, and be able to project sale numbers and the potential for expansion.
4). Cash flow and bookkeeping
Businesses fail when there is no cash flow. You must diligently manage your cash inflow and outflow. Budget for every required cost and write down every expense. Match these with every coin that comes in or goes out. This means that you must have a dedicated account for your small business. “Always separate your accounts. When I started my business, I did not know the importance of having separate bank accounts. I used to mix my savings, profits, personal money, and business capital in one bank account. I had poor book keeping skills,” says Linda Chepkwony, the founder and managing director of Kyle & Ibrahim Limited. The inability to manage her cash flow, accounts and do proper book keeping always complicated operations and finances whenever she needed to bring in new stock or settle pending bills. This is echoed by Liz Simiyu the founder and director of Slim Therapy Limited, an electrotherapy-based weight losing firm. “My business didn’t adhere to any cash flow rules. There was no cash flow budget, no cost control, no follow up on payments, and no projections or plans for shortfalls. Bookkeeping to me was a record of how many customers showed up and how much they spent,” she says, adding that she only broke even when she started carrying out strict and routine book-keeping.
Don’t cut corners with taxes and licenses. From onset, be aware of what your tax obligations will be and what operating licenses you will be required to pay for your registered business. According to Jeremiah Rugunya, a certified public accountant and the lead consultant with Prolific Business Consultants, Income Tax and Value Added Tax are two of the major taxes for people with small and medium businesses. “There is income tax for companies and individuals. Companies are taxed at a flat rate of 25 per cent (30 per cent before coronavirus) of the profit made.” Sole proprietorship and employees fall under individual income tax and are taxed under a graduated scale (Tax bands). “This is similar to PAYE. If you make above 24,000 profit in a month, you start the tax graduation from 10 per cent to 30 per cent depending on the amount made,” he says.
6). Marketing, networking and competitors
Keep tabs with what your competition is doing. Market smartly and build a network of people who help your business. Your network will be your net worth. People are great assets. “The two things that have brought me this far are networking and undivided attention to product sustainability and improvement. I am always working to improve my services and products. I have realized that leaving a customer happy and satisfied beyond their initial expectation is the surest way of having return and referral business,” says Lawrence Kinyua, the founder of Archlaw Construction Limited
