Business planning key for entrepreneurs

This week we will conclude our discussion on how some employers may contribute to high levels of unemployment in Botswana. We will look at two things – business plans and cash flow; two things that involve much paperwork but which many business people unwisely overlook to their peril.

Many entrepreneurs lack the ability to produce sound, well- constructed business plans, so vital for setting up any business and a prerequisite for obtaining financial assistance. Most institutions will not turn down a great solid business plan, particularly when they realise that a lot of research went into putting it together.

A business plan simply shows the details of a business over a certain period of time. This is the first thing that any business person should do before starting up a business, even before clearing the land, buying machinery, paying for connections of water and power… Setting up any business takes time and drawing up a business plan will do much to reduce the risk of making rash, foolhardy decisions that may be regretted later! Spending adequate time here will be time well spent! After all, if you fail to plan, then you plan to fail!

There are a number of reasons why a business plan is important. Firstly, it will help a person to decide whether his business will make a profit. After all, private businesses are not charities; they have to make profits to survive! Secondly, a plan will also enable a person to obtain loans from institutions such as banks and the Citizen Entrepreneurial Development Agency ( CEDA) that lend money.

Thirdly, it will help a businessperson to identify any weaknesses in the original business idea. For example, a person wishing to venture into furniture making may not initially take into account all the costs that are involved. Before, he may have only considered the cost of timber and machinery but not other costs such as water, power, labour and transport. Since such extra costs need to be shown on the plan, he will now be forced to consider them.

Finally, a plan will help a person to check on the performance of an existing business. After a few months, our furniture maker may find out that he is spending more on power than he had stated on the plan. So, he will need to reduce these costs if his business is to make sustainable profits; hence, he may now decide to switch to solar power.

A good business plan should have the following elements: Business details:

Information about the location of the business and the people who will run, or manage, it.

Objectives or aims of the business The product and its market: Details of the product and how and where it will be sold. Also, information concerning possible competitors who currently are producing the same product.

Finance: Very important and no details must be left out here! Information about costs and information about how the person will finance the business – from personal funds or loans/ grants from banks or other institutions, such as Citizen Entrepreneurial Development Agency ( CEDA). Details of sums of money must be included.

Pricing: Information about the selling price of the product. The selling price of the product should be higher than total costs – this will show that the business is likely to be viable, or profitable. However, it should not be pitched too high since this will deter potential customers from buying the product.

Future of business: Information about future prospects for the business. For example, is the business likely to expand and produce new products?

Sources of information: Details of where the information needed to complete the business plan was obtained. Some of this information may have been obtained through market research which we will look at in a future article.

Cash flow: This refers to the flow, or movement, of cash in and out of a business. Cash flows out when a farmer, for example, pays for inputs such as seeds, tools and livestock feeds. On the other hand, cash flows into the business when the farmer receives income from the sale of his produce.

A good cash flow situation occurs when a farmer receives income regularly throughout the year and is, therefore, able to buy his inputs and pay his bills on time without the need to borrow too much money. This may occur if the farmer is selling eggs or milk each day throughout the year. So, it is essential that any business owner learns how to maintain a good cash flow throughout the year.

The cash flow can be calculated simply by subtracting the money spent from the money received over, for example, a period of one year ( however, the cash flow may be calculated more often, say monthly, if the cash flow situation is more critical). For example, total receipts from the sales of eggs might amount to P200 00 over one year. And total costs ( from money spent on water, power, labour, rent, transport, marketing costs etc) might be P180 000. This means that the net cash flow will be: P200 000 – P180 000 = + P20 000. This is a good, positive cash flow.

In contrast, crop farmers may find it more difficult to receive income regularly from the sale of their crops. An example might make this clearer. Most farmers in Botswana plant their summer crops when the rains start, usually in November or

December. These rainfed crops are then harvested at the same time four or five months later, in April or May. This may result in a ‘ feast or famine situation’ for the farmer; in other words, a poor, uneven cash flow. This is because much income may be received during a few months of the year whilst no income is received at other times. But the farmer still has to make payments all the time in order to run his farm efficiently! For example, money must always be available to pay the permanent farm workers each week, to maintain farm machinery in good condition, and to pay the monthly interest on loans, and so on. And if wages are not paid on time then workers may go on strike or report the farmer to the nearest Labour Office which is not exactly the publicity that the farmer would like! After all, workers need money to pay their everyday expenses.

We so often hear of business owners who claim that they do not have enough money to pay their bills. This will occur if there is a poor, negative cash flow. For example, if money received from the sale of maize is P300 000 and the money spent amounts to P440 000, then the net cash flow will be: P300 000 – P440 000 = - P140 000. Such people may then be forced to close down their businesses and retrench their workers. Some people claim that money is the only solid substance that behaves like a liquid. Like water flowing in a river, we see money coming after selling our products; it then reaches us but all too soon it has passed beyond our reach and it’s impossible to retrieve it no matter how hard we try!

In a textile business, businesspersons may have a poor cash flow if they do not maintain their sewing machines in a good state since this may disrupt production and business may grind to a halt. Hence, no income will flow into the business, but money will still be needed to buy cotton, wool… Cash flow will also be poor if they are not able to sell their products throughout the year. This may occur if the business depends on only one buyer who may, for some reason, decide to buy from other suppliers.

What then can businesses do to improve their cash flow? They could borrow more money but there is a limit to how much they can borrow. Also, the business owner may not be able to pay the high interest charges and some lending institutions may not lend to people who already have too many loans. And if the business owner fails to pay back the new loans then his name may be blacklisted and he will then find it very difficult to borrow money again.

Businesses should also seek to sell their products to more than one customer; this can be achieved through advertising. For example, a farmer could sell his cabbages to a number of large supermarket chains. Now if one of these decides to stop buying his produce, then he will not be too adversely affected and will still likely remain in business. Similarly, a clothing manufacturer can supply shirts and jerseys to a number of large retail stores that sell these goods. Businesses should also sign contracts with their major customers; such a contract will give details of the duration of the contract, what is to be supplied, and how much. And it may also outline the penalties should the buyer later decide to break the contract. Businesses should also ensure that they order the required inputs in good time to maintain continuous production.

Crop farmers can switch from summer field crops to vegetables that can be grown throughout the year; for example, tomatoes in summer and rape and spinach in winter. However, this can only be done if the farmer can irrigate the winter vegetables since winter is a dry season. They can also carry out staggered planting of crops throughout the year. This means planting a crop at regular intervals throughout the year. For example, the farmer can plant carrots every two weeks on his farm. This means that he will be able to harvest carrots also at two- week intervals thus ensuring a continuous flow of money into the business. A fruit farmer may experience poor cash flow since his trees may take several years to mature and bear fruit. But in the meantime, he can plant rows of vegetables between the tree rows and so receive income while he is waiting for his trees to produce fruit.

And finally, a lack of basic computer skills is all too common in many businesses; such skills are important these days since we are now living in the age of digitisation.