The World Bank puts Kenya as a growing economy with a 5% growth rate by the end of 2012. Despite of this, businesses are still finding it difficult to save, invest and execute their organizations growth plans. A good number of factors keep affecting the ability to generate our desired profitability from the rise in energy prices, high rates of inflation, cost of borrowing, labor and office facilities would either directly or indirectly affect the cost of doing business. Since most of these factors are out of the control of the entrepreneur, it is critical that you put a close leash on your expenditure with the intention of weeding off expenses that do not directly increase your sales.
This will directly affect your traveling costs. If you have a habit of having meetings outside the office you may want to watch out for this cost. You may also want to take advantage of technology such as conference calls or skyping as an option to physical meetings. If the nature of your business is one for delivering products to the customer, it would be helpful to analyses the cost of purchasing a vehicle through hire purchase, leasing one and the cost of public transport. Select the option that is conducive to your business. When considering these options, one must be careful to include the full cost of the vehicle which includes maintenance insurance, fuel and possibly a driver.
HIGH RATES OF INFLATION
Increase in inflation will reduce your purchasing power making it difficult to purchase supplies needed to deliver your service. In addition to this, it is also important to remember that the rise in inflation will also reduce the level of disposable income for your customers hence reducing your sales volumes. You then have two options, to reduce your cost of production or differentiate your outputs to increase the value of your services. For extremely profitable ventures, it would be prudent to hold on dividend payouts and invest the surpluses in secure investments such as real estate, or fixed income securities.
COST OF BORROWING
Debt can be a good or dangerous for the business. The high cost of interest makes it expensive to acquire capital to either start a business or provide working capital. Short term borrowing tends to be more expensive and if not carefully monitored, you may end up working for the financial providers. It is critical that during a season of high interest rate to use debt to acquire assets that have a high rate of return and to structure it in a way that you are able to pass the cost of borrowing to a third party.
The recent increase in minimum wage is a good indicator that the cost of labor is on the rise. You have to make a clear distinction between a profit center labor force and a cost center. Cost center labor forces are your administration, support staff and back office operations. They do not directly contribute to producing sales. Companies should consider outsourcing such services to reduce the wage bill, which included the cost of supervision and training. One must be strategic when recruiting. Staffing must be seen in the light of either increasing revenue or saving costs. A gap analysis will help you identify the critical skill needed to generate value that will get you out of a hole or propel you to greater heights.
A good office space will give you a sense of stability and comfort for you to execute your operations. Support services such as electricity, water, office refreshments, stationary and internet come with the territory. These are all expenses that are within your control. Business centers are a good way to save on facilities cost since these services are provides in bulk.
SAVINGS AND INVESTING
You must always be moving towards reducing your business risk and the best way in doing this is growing your passive income. This is income that is generated from your investments. Over dependency on one source of income could be detrimental in the long term in an environment where costs keep escalating. Investing in real estate, a second business that compliments the existing one are some examples of investment worth perusing. Investing in assets that are tax allowable would also be of great help in your attempts at reduce your tax liability.
The cost of doing business is predominately due to factors that are somewhat out of the control of the entrepreneur. As a result this increases the risk of doing and sustaining your business. You have to sharpen your skills and efforts in reducing this business risk through carefully making value adding decision for your business.
Alvin Mwangura, PassionProfit Finance Expert & CEO ARI Capital Ltd