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There is a Swahili saying that goes 'Kuzaa si kazi. Kazi ni kulea', or'Giving birth is not as hard as raising a child'. I don’t have any idea if it is in order to relate the same concept to business or to come up with an adage; 'building up the business is not as hard as keeping it on track', any relevance?
There is no one blueprint of coming up with a triumphant business. If you are lucky enough, you might me born of parents who are already thriving in business that you take over. If not don’t hesitate to read up on Sydney Sheldon’s novels and learn about how a young and impecunious girl working at a boarding house ends up owning half of New York’s buildings, but none of this is that important. What I am focusing on is how one successfully runs an already established business?
Entrepreneurs who are devoted look for means and ways of maximizing the already maximized profits. Cost minimization and revenue maximization will take heat. Staff will end up with low remuneration and cheaply produced products with poor eminence that will be fed into the market at high prices. Loss of sales and de-motivated staff are typical in such a business entity. Super business units have come crashing down overnight, so this can’t work.
Others would use force to succeed in business. They would threaten their clientele even with death if they fail to pay up their debts and use guns to force defaulting debtors to sign up to their last asset as repayment for their debts. This works superbly well in movies and novels. I don’t have any idea if it can work in reality.
Others might use their political influence to secure plum deals and even obtain cheap loans. We have seen this working especially in developing nations with young democracies. Developed countries are not left out either, but what of when there is a political change? I have seen cases where banks that were influenced to give loans to ‘politically correct’ people giving them overnight notices to pay up all their dues. The outcomes have always been disastrous.
Perhaps the most efficient way of managing your business is proper management of working capital over and above that one of long-term assets, liabilities and equity. This is because working capital is the lifeblood of any business organization. Like blood circulating in the human body, working capital is the amount of capital that a business has available to meet its day-to-day operational requirements. This way, it circulates in the business.
Working capital management involves the management of debtors, cash, creditors and stock.
Credit is an unavoidable tool in modern business. This means that if you offer no credit you might end up having no sales. Offering lenient credit terms may add up to high sales and the sales may turn up to be bad debts. So how do you manage your debtors to avoid such a situation?
Debtors constitute a substantial portion of current assets in many business entities and hence investment in them should be kept at an optimum level. Investment in debtors depends on the volume of credit sales and the period taken to collect the debts. These can be influenced through a change in credit policy.
Credit policy is the contribution of three decision variables. They are the entity’s credit standards, credit terms and collection efforts. A credit standard is the criterion used by an entity to decide on the type of customers to whom goods could be sold out on credit. When these standards are too strict, the entity has little uncollectible debts but low sales too. On the other hand, when they are too lenient, the uncollectible debts will be as high as the sales. The standards should be moderate and proper assessment of customers must be done.
When assessing a customer to whom you intend to give credit the most important things to take note of are the length of time that the customer has been in business, qualifications and experience of key personnel and rate of growth of the customer’s business. It is also necessary that you see a record of the customer’s adherence to credit terms, as offered by other suppliers and financial institutions, and of course the financial statements of the customer’s business showing good performance. The customer’s character in terms of honesty, integrity and capacity to settle debts should be assessed. If possible, collateral should be pledged.
Credit terms refer to the period allowed to customers for making payments. One significant cost of investing in debtors is the investment return foregone. This is the return that would have been earned if the resources were invested in other forms, e.g. assets that earn the entity interest and dividends. The cost increases in direct proportion to the increase in the credit period. This period can be reduced by giving incentives that encourage prompt payment of any amounts due. This is done by giving cash discounts.
Collection efforts are the measures taken by the firm against customers who do not pay on the due dates. This may involve reminding the customers to settle their debts, starting legal proceedings or writing of the debts.
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Martin Tairo
As a very creative Architecture student at the University of Nairobi, i have had lots of interests in many forms of arts. These include performing arts, writing and drawing.
I have written many articles on issues ranging from humour, politics, religion and even the most controversial topics like human rights and abortion.
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