12). Delaying that decision for one month will cost you a salary for which you will get no benefit.
Trust me, I have been a victim of this, and it has cost me dearly in business. I once employed a young boy because I knew the family and sympathised with their financial situation. Maybe that was a mistake in itself! It turned out that the boy did not have the same values as the family I knew. His work ethic was inexcusable, his attitude indefensible. I kept thinking about the family every time I had to take a logical and desirable decision. I confided in the father instead of confronting the boy. His father “fired” him from my business before I did.
The bottom line
Remember that business is about taking a risk for a reward. There is no point in doing it if it is not profitable. We are not talking about starting up an NGO, we are setting up a business, and a profit is what the business has to offer. You need to remember that there are various alternatives to starting and running your own business, for example:
1 earning a salary through formal employment, or
2 investing the money and earning interest and growth.
Although these options have their advantages and disadvantages (for instance, formal employment could require a qualification and experience which you might lack), the message is that they should be considered carefully before you venture into business. There is no point in entering into a business that will ultimately give you a return of R5 000 a month when you could be employed and earn R15 000. By the same token, there is no point in putting your hard-earned savings into a business to earn a return of 4% when you could be investing elsewhere at a rate of 7%.
Before you embark on a business venture, make sure that you are entering a profitable course that will generate the returns you are looking for.
There are various things that you need to anticipate here to assess whether this venture you are embarking upon will work for you and give you the financial results to which you aspire.
Return on investment
An estimate of your return on investment will indicate to you if the money you will put into your business will give you the rewards you are looking for. It is based on a simple calculation of the net profit (we will discuss this concept in the following chapters) as a percentage of the savings that you have generated over the years and invested into your business.
Example
Sam puts R30 000 into his catering business and anticipates that, after paying all his monthly bills and the running costs of his business, he will make a net profit after tax of R1 500 a month or R18 000 a year. His return on investment is R18 000/R30 000 x 100 = 60%. By business standards, that is a good return on Sam’s investment.
Your bottom line will be impacted on by a number of factors that we will discuss in the chapters that follow. At this point it suffices to alert you to the fact that unless your business provides better financial benefits than the alternative does, it is not worth entering into.
I think it is critical to note at this stage that, although the bottom line and the return on investment are key financial considerations for or against getting into business, there are numerous non-financial issues you may want to consider. The business may not offer you the profit or the returns that you are looking for, but may provide you and your associates with employment opportunities and an opportunity to make a contribution to society that fulfils your ethical desires. I have been running a business for the last three years that has not given me a cent in returns or profits. Apart from the fact that I am hopeful of its growth potential and that the trends suggest that the returns will surely come, the business employs more than 15 people in permanent positions. That, on its own, is motivation enough to keep running it.
Competition
A critical factor that we often fail to consider when deciding on business ventures is the extent to which competition can dilute our earning potential and even sink us. We often decide to enter into a particular kind of business because we like it. In fact, in many cases we do it because we have seen it working well for our friends and people we know, and we believe that it will be a safe and tested market, therefore we cannot fail. We do this without realising that those people have created a supplier base in the market that will increase consumer choices and dilute demand across the suppliers, thus reducing the prices and market share to our detriment.
Although venturing into a competitive environment is risky, it does not mean that you should not do it. All it suggests is that you develop a thorough assessment of the terrain to establish the following:
1. The size and potential of the market for your commodities
Sometimes you may find that the demand for certain commodities is well in excess of the supply; in other words, more people need more of a commodity than is available. Often people end up importing these commodities because the local market cannot meet the demand, or they resort to alternative commodities. These are the business ventures that you want to explore seriously, as they give you immediate space in the market to make money.
The opposite can also be true. You often find an influx of suppliers where the demand is not really that great. Getting into such a business is like setting yourself up to fail.
I am not suggesting that businesses that enter into a highly contested market are doomed to fail. As has been mentioned, a huge base of suppliers increases consumer choices, which invariably dilutes the potential of your business. But having made that statement, I want to note that there are many factors at play here. Right at the beginning of the book, I presented a diagram of the dynamics surrounding your business. Striking a right balance among these will lead to success, sometimes in the midst of steep, very steep, competition. The challenge in business is how to strike that balance.
In looking at the size of the market, we should not forget that South Africa is a global player and is generally well accepted in neighbouring countries. This creates a huge opportunity for our products to enjoy a market in Namibia, Zimbabwe, Swaziland, Mozambique and many other states. We often limit ourselves unnecessarily when we assume that we can play only in our local economies and not spread our wings more widely.
When I started my business consulting company, I never imagined operating outside KwaZulu-Natal, South Africa. I never explored avenues outside this space. Intensifying my research and striking the right business partnerships opened my eyes to the opportunities that existed for the business in the Eastern Cape, Gauteng and even outside South Africa’s borders in countries such as Ghana and Namibia, where there is an even bigger demand for the services that the business has to offer.
2. The critical competitive criteria in the market
In light of serious and vibrant competition for the venture you are contemplating, you need to establish what the stimulus for the buying community is. In other words, you need to ascertain what the buyers respond to. Typically, buyers respond to the following:
Cost, Service Excellence and Quality
You will often hear people saying, “I like buying at Joe Soap because they are cheap,” or “I will never place an order with Tom Shank, because he takes a long time to deliver”. Some will say: “Even though his prices are steep, I prefer him because his quality is good; you don’t have to keep replacing his stuff.” This basically gives you an indication of how players get sifted out from the market space because of their inability to satisfy the
