Money is a key to happiness. Accumulation of it is what life has come down to sadly. Anyway, you can only achieve this as an outcome of something you do that is perceived to be of value. Therefore, this “something” is what you should focus on. I presume that your thing is running a small business or that you intend to start one. Congrats.
If you regularly read our blog, you know we have ended one argument. We havd confirmed that working capital is the most important aspect of a small business. There are other money needs like acquiring assets, diversifying to new products, etc. But these grow in importance as your business grows.
Working capital consists of many things. You have to budget for all of them. Truthfully, though, money is tight in entrepreneurship. You won’t always be able to carry out plans to the fullest. This means you have to develop a knack for juggling different money needs. We want to help you set a priority list for business. The most important money needs are those with the most adverse, or negative, effects when not met.
Our list starts from most important (descending order):
It’s not a good idea to be completely broke as an entrepreneur. You need to have some money kept aside somewhere. This may be coins in that jar, notes in your drawer, M-Pesa balance, or money you can withdraw from an ATM at your convenience. Be a saver not a spender.
Cash is the most liquid asset. It enables you exploit the small business advantage of flexibility. With it, you will always be able to immediately direct resources to the most urgent needs. Compare this with Kenyans with those “For Sale” posters plastered on the car back window. They have to wait for a buyer first.
This cash asset may not necessarily be raised from a portion of your profit that you keep aside. It could very well be you injecting your personal savings into the business. The point is to be able to point at some amount in cash as readily accessible for your business.
You need to keep your team motivated. Much of this topic has been explored by a guy called Frederick Herzberg. You can read more on his work. Timely payment is a big part of motivation. This, when you consider small businesses in Kenya don’t give too much in the way of non-monetary compensation.
It is necessary that you first organize your employees in the most manageable yet least costly manner. Entrepreneurs in Kenya experiment with contractors, work-from-home and outsourcing; for example. You must also come up with compensations and intervals of payment you are able to handle.
Lastly, part of meeting salaries money needs is accepting delays in payments can happen. For this, have communication mechanisms to minimize politicking.
Is debt good? Yes. But charging interest on debt is not. We will get into that someday.
Every small business has a short term debt it needs to settle. This may be to your suppliers or for facilities like Fuliza, which allows you to complete M-Pesa transactions even when short of money.
Your duty is to be honorable and meet your end of the bargain, not switch off your phone (haha!). Paying your short term debt helps you maintain business relations, and advantages, you have worked hard to develop. The reason these debts are lower in importance than salaries is because you typically have room to renegotiate repayment terms. You need to take advantage of this position from now on, if you were not already.
If you are a trader or a manufacturer then you do deal with stock (inventory). You must wonder why we have ranked it so far down yet it is what your business is based around. It’s because stock can be acquired on credit. Also, how much you stock depends on your outlook on business and the things happening around you.
For example, if you anticipate prices to rise then you will buy a lot more stock now and avoid future pain. Similarly, if prices of what you stock drop it’s only wise to take advantage of your blessings. Another angle may be you expecting to make major sales. Maybe it’s Christmas and you just want to be ready to profit from all those Kenyans spending their year’s savings (before complaining about another January).
5. Pre-paid expenses
Up to this point, we have listed 2 current assets and 2 expenses or current liabilities. A really good entrepreneur will go further and have one more current asset in her business money needs priority list. This is by paying for expenses ahead of time. It could be your motorbike delivery guy or rent, a few months ahead.
Doing this is a good idea in times you have enjoyed a good business outing. It will be a better way to spend your money than that top that will “go out of season” soon enough. You should know that pre-paid expenses are best suited for things that directly affect production or sales.