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The Thousand Rand Challenge

Gavin Chait www.whythawk.com

Start a business from scratch with only R 1 000.

It must be a real, profitable business and it must be possible to earn a living from running it. The business should also obey the laws of the land. Other than these rules, any and every business is allowed.

Do you think you're up to the challenge?


The process of business Edit

All business is driven by the needs of ordinary people. If everyone is hot and decides they want to eat ice-cream, then the ice-cream sellers do well. If people change their minds and want to eat something else, then the ice-cream seller may be left with a lot of stock on his shelves which he cannot sell.

This leads to the idea of supply and demand.

If the demand for a product increases, but supply for that product doesn't, then prices go up. This happens because people want that product so much that they are prepared to pay more to get it. The increase in the profits that businesses are making on that product attracts other people to start businesses selling the same thing. Soon the supply starts to increase as all those products are offered to people at the same time and, since clients find that they can get the product everywhere, they are prepared to pay less, so prices fall.

If supply gets too great, then some businesses may be forced to sell their goods for less than it costs them to produce those products just to get rid of them. If a business loses money for too long they will run out of cash, and then they go bankrupt.

Business is about balancing the demands of ordinary people versus your ability to supply those needs at a price that guarantees you a profit for the work you put in.

It is never a good idea to enter an industry where supply is already high relative to demand. These markets are very competitive with lots of businesses selling the same things to the same people. There are already plenty of spaza shops, shebeens, meat braaiers and the like. These businesses require few skills and are easy to get into, but very difficult to make a profit out of - unless you do something special and become popular.

Every business acts as a channel between the resources you need to run your business, and the clients who want to buy what you're selling. The better you are able to understand what your clients want, and the ways of producing these things for them, the better you will do.

Your suppliers provide you with the inputs that you need, and your outputs become the things that you sell to clients. Sometimes, as in the example of the cut-make-trim industry, your clients will supply you with materials to produce things for them.

Some businesses suddenly become unimportant because of changes in technology. People who sold LP records were displaced by people who sell tapes and CDs. In this example the products used to carry the music changed but the need for music was still the same. It is important to understand what need the business is helping its clients to meet, rather than the specific products required.

The best businesses are those where there is:

  • High demand for a product but limited supply of that product
  • The product requires you to have specialised skills to make it, so that not just anyone can compete against you
  • The demand will be over a long period - years and years - so that you can earn a living from it

There are always other products that do similar things that can be used as substitutes for the things that you sell. Your price is based on the importance of that product to your customers. They could decide that you're too expensive and get in a taxi and go somewhere else to get it. You could be making so much money that others decide to start competing with you. You could become so used to people buying from you that you reduce the quality of your products and make people angry.

As long as you balance the needs of your clients with an awareness of the business environment you should do well.

Choosing a business idea Edit

Sometimes needs are obvious: food, clothing, transport, child care, hair dressing, telephone centres. Sometimes they are not: roof repairs, furniture making, stock delivery. Sometimes they require skills: TV repairs, plumbing, building, car repairs, welding

The difficulty is not in finding ideas - for there are many - the difficulty lies in finding one that is correct for you.

Some points to consider while idea hunting:

  • There must be demand for the idea and for the products of that idea
  • People must be prepared to pay for it, and to pay more than it costs to produce
  • There must not be too much competition from others
  • It must not be too easy for others to copy you and go into competition against you
  • You must be able to make or deliver the products, or to learn how
  • The business must be affordable for you to start
  • You must enjoy doing it

The last point may seem strange. Why should you need to enjoy it if it makes money? The answer is that business is competitive between both clients and other suppliers of the goods you are offering. People don't like buying things from business owners who aren't happy - they know that the quality won't be as good.

If you aren't enjoying the business you will not put in the effort required to make it successful. Running a business is very difficult and tiring. It is much harder than working for someone else.

When you work for someone else, they tell you what to do and have to figure out what to do when anything goes wrong and any problems need solving. When you run the business the person who solves all the problems is you - no-one else will do it.

If you don't want to solve those problems, they won't get solved. And if they don't get solved, you will soon be out of business.

Recognising your limitations Edit

R 1 000 is not a lot of money. It is a tremendous challenge to spend this money wisely so that it will return a good investment. The challenge goes a lot further than simply identifying things you need that fit into a budget of R 1 000.

You can't buy a motor car for R 1 000 and so you may feel that, for instance, running a delivery business is impossible. But you could buy a reasonable second-hand bicycle for R 200 and so your delivery business could start simply by catering to people living within a short distance.

You could even form a network of independent businesses. If your business gets the clients and coordinates deliveries, then people with their own cars and bicycles can be contracted to do the work for you without you having to have them as employees.

Certainly it is a challenge, but the truth of the matter is that the majority of South Africans do not have hundreds of thousands of Rand to invest in a new business. Even more significantly is that having that much money does not always help if you have not learned the skills that working with such a limited amount of money require.

Keeping enough cash available is the most sensitive part of running a business. You are always going to need real money in the bank to pay for unexpected bills or for your stock. Not everyone will allow you credit and the ability to manage the amount of money you have is critical. Your cash protects you from needing to borrow money and allows you time to solve problems. This is known as cash flow management.

Cash in the bank is not profit. You may have committed that money to pay bills. You may need it to buy stock. Without money in the bank you cannot run your business. Profit can only be calculated from careful record keeping. Don't make the mistake of spending your cash just because you think it is profit. It isn't.

Some very large businesses can't keep track of small expenses over a wide range of different products because they don't know how and they get themselves into all sorts of cash flow problems. The limitations of the challenge are a tremendous spur to efficiency. Many business owners buy expensive equipment that they may not use very often when renting it on the occasions they need it would make more sense.

Aim for a 50:50 or, at most, 60:40 split of capital investment to cash flow. By this I mean that you should spend R 500 to R 600 on the tools and equipment you need to offer your product range, and a further R 400 to R 500 on the cash you need to finance stock and operate on a day-to-day basis. The most important thing about whatever business you choose is that you must start to earn within the first week of buying your capital goods. Once you've spent R 600 on equipment and maybe another R 200 on a few materials, then the other R 200 has to pay for taxi fare, food and other expenses. It won't last very long.

Point 1: Identify needs - design your business around the function or objective you intend to serve, rather than around the equipment you think you must buy

If you start with the assumption that, "Without a car, I can't start a delivery business," then you're looking at the wrong business. The business is not about the car, it's about deliveries. Deliveries don't have to be done in a car; they can be done on a motorbike, or even a bicycle. Post Offices around the world have operated for hundreds of years and have required no more than that their delivery people are able to walk.

By starting your investigation and looking at the expensive things you can't afford to buy, you are setting terrible limitations on yourself. First decide what need that your clients have that you will meet, then look at all the different ways you can meet that need.

Point 2: Time - you don't have very much time and must start to make a profit from the first day of trade

You may want to win tenders for cleaning. But, unless you already have a good reputation, people will want to hear that you have the necessary experience. You need to meet the right people and get used to tendering. There is a way of writing your tenders and understanding the needs of your clients that takes a while to learn. Meeting the people who can introduce you to key decision makers is also important. Important tenders are awarded to people that the purchasing officer has heard of or knows by good reputation.

It can also take months for a tender to be awarded, the work completed, and then only do you get paid. You won't have enough money to wait around before you receive an income. Tenders are a very bad way to start a small business when you have little money to spend.

There are plenty of businesses that require you to wait for some time before getting paid. Many clients will expect you to deliver the service before they pay - such as a gardening service. You would have to buy all the equipment, hire staff, spend time completing the work, and only get paid much later. Government work in particular pays very slowly.

You want a business where what you're selling is cheap to produce and can be sold immediately. For instance, if you make vetkoek in the morning, you should be able to sell it that same morning and use the money to make more vetkoek to sell in the afternoon. That way your money works for you.

Point 3: Local - don't go too far from home; you understand the needs of your neighbours far better than you understand the needs of a bunch of strangers from another country (or even another part of the same country)

It is sometimes very easy to forget that the people living right next door to you are also customers. They have to buy things that are very similar to the things that you want to buy. The problems you have are the same as the problems that they have. By solving your own problems, you solve theirs and can earn a living.

If you want to sell things to people who are very different from yourself - such as foreign tourists - you may not understand their needs. You will have to travel to find them, spending money to do so, and it will take you a while to learn how to meet their needs. If you get it wrong you will be left with a bunch of stock that you can't sell, or have to sell for less than it cost you to produce.

You don't have to spend time getting your neighbours to know who you are and trust you, they already know you. The money you save on transport can also be spent on selling more products. This will allow you to return a greater amount of profit on your investment of R 1 000.

Point 4: Add value - the easiest businesses already have too many competitors ("cash and carry" businesses like spaza shops and shebeens); you must make or fix something, or offer a simple service that people need every day but can't do themselves

If all you do is go to a large supplier, buy a stack of toilet rolls (for example) and go and sell them in your neighbourhood, then the difference between you and your competitors is only about how much profit you want to make. You are all going to the same supplier, buying the toilet rolls for the same price and then selling them. You have the same expenses and the same problems.

If you buy some tools and some wood and make tables then you are adding value to the wood. The value you have added is the amount of work you have put in to produce a useful item that people want to buy. If you make terrible tables, then you would have destroyed the value of the wood. If you work hard and make tables people want to buy, then your effort is rewarded by selling for much more than the wood is worth. The selling price is the value of your labour plus the materials you used (wood, nails, glue, and so on).

If you are very skilled, and your tables are very well designed and made, then your time is worth more than that of someone who just makes ordinary tables. This is why working to the best of your abilities is worthwhile.

Point 5: Simplicity - the easier the business product, the better - you don't want to waste time explaining it to people

Simplicity sounds as if it is contradicting the need to add value. It isn't. This is about time. You might be a very good welder and can make a whole range of things that require a high level of skills. Say you could make candle-stick holders and you could make specialised brackets to hold TVs on walls to prevent them being stolen. People can understand the candle-stick holders very quickly, they are small to make and cheap to sell. The brackets have a much smaller market that may be much more profitable, but it could take you a while to get enough customers. All the time that you're trying to sell the brackets, you have to explain how they work.

In the short term it is better to make and sell the candle-stick holders while you gradually build up your reputation. Once you have a steady income from simple items, then you can start exploring new markets that take time to develop.

Point 6: Compromise - you may want the latest and best equipment, but you are going to have to accept second-hand stuff, rent, or figure out a way to do without

You might want an electric stove. Will a primus stove work just as well? You might want to buy a welder. Can you make do by buying time on a welder at a factory nearby or hiring one from a tool company? The manufacturing process can be batched into different stages. For instance: measure, cut, bend and drill all the bits of steel during the week; hire the welding machine for a weekend and work hard all weekend.

List the things that are essential, that if you don't have them people just won't buy from you. Then identify everything else that you would like to have but might just have to do without. If you have friends or family who can lend you those things; fantastic. If you can rent them or buy something which works just as well but is cheaper; perfect.

If not, do without until you can afford it.

Planning your business Edit

Just as with people, every business is different. They may appear to be doing similar things, but the way in which they do so is dependent on the personalities of the owners, employees, suppliers and customers.

It must be stressed again: R 1 000 is not a great deal of money. If you make any mistakes, purchase the wrong things or spend too much time waiting for clients to find you, then there is the possibility that you will run out of money and be unable to operate. It is important to understand these personalities as well as other factors such as the preparation of the products, the costs and marketing of the business.

The process for developing a business plan is a lot like figuring out how to bake a cake for friends if you have never cooked before:

  • First you decide on the types of recipes you're interested in making;
  • then you go and look at how other people bake similar cakes;
  • then you ask the people who will eat your cake what type of cake they'd like;
  • next you prepare a recipe for your cake working out where you will get the ingredients and what they will cost;
  • then you prepare a sample cake so that you can find out if you got the recipe right;
  • if that is in good order, then only will you prepare the final cake for your friends;
  • after they have eaten the cake, then you find out from them how they liked it so that you can improve it for the next time

You can slowly add in new recipes so that you always keep your friends interested in what you're going to prepare for them.

A business is very similar and the process we will follow will take you through the investigation without worrying too much about preparing a complex document. At the end of the process you want to know that the business will be successful and that it will make money.

When filling in the blocks rather give as much information as possible. Describe everything in detail. Don't take anything for granted. Training courses, recipes Ö everything must be described so that when you come back and look at it in a few months time you don't have to remember anything. Everything will be here, waiting to remind you of what to do next.

A timeline with a set of responsibilities is a valuable way of setting out what you need to do during your investigations:

  • What needs to be done?
  • By what date?
  • Who will do it and do they know they need to do it?
  • How much will it cost to achieve this?
  • How will you know when it is done (what is the list of measurable things that you can check against)?
  • Done?

You can come back and add or change things, move things around and check items off as they are completed.

An example is shown below to give you an idea of how this might look:

What needs to be done?

By what date?

Who will do it?

Cost?

Measurables?

Done?

Describe my business 18/07/05 I will do it R 20 taxi fare Complete all the tables, go and meet with John who owns a similar business in Paarl and find out how it works.  
Meet with my advisor to discuss my investigation 20/07/05 My advisor and I R 15 taxi fare Basic idea of what business will do is agreed on  
--- all the way to --- --- --- --- ---  
Recipe for bread developed and tested 14/09/05 I will do it R 25 for ingredients

Bread baked according to recipe. I will invite four friends to my house so they can taste it and tell me what they think.

I will need to buy: 1 kilogram flour, half a dozen eggs, salt, milk.
 


You should be as detailed as possible. If you cut corners, or don't do the things you said you would, you are only cheating yourself. It is a bit like going on a diet to lose weight and then sneaking to the fridge to eat a slice of cake when no-one is watching. The timeline is for you, not for anyone else. If something isn't possible by a certain date, then change the timeline to a date that is possible. Just make sure you change all the effected times.

Get feedback on your investigations. Don't go to friends or relatives. They are very important to you and they will want to look after you or make you happy. They might not have the experience or ability to answer your questions. It is best to choose someone who has been in business for a while, or who is a professional advisor to offer guidance. Getting more than one opinion is also important since different people see things in different ways.

Describe your business Edit

The very first thing to do is to define what your business is going to sell and everything required to achieve this. Answer the following questions in the blocks provided. Feel free to use additional paper or make copies of these pages.

You are likely to come back and revise or improve your answers as new ideas come to you, or you change your mind. Don't worry about it. It is more important to do what works, changing your mind if you have to, than it is to worry about making a mess in this book.

  • What exactly is it that is going to be sold or done?
  • What skills do you need to do this? Do you have this training? If not, where will you get it and how much will it cost?
  • What tools or equipment will you need to do this? Where will you get them, and how much will they cost?
  • How much space do you need to work from?
  • Where will you find this space, and how much will it cost you to rent?
  • What sort of people will buy your product? Who are they and where do they live?
  • How much and how often will they buy? Will they come to your shop or will you have to deliver? Will they be happy coming to your shop?

Now have a quick look at the costs you have put down. Do they add up to more than R 1 000? Do they add up to more than R 600? If they do, what compromises will you make to reduce that expense? Can you do without them? Can you rent? Do you have to change your business idea?

You only have R 1 000. You cannot wish the extra money to appear to pay for your extras. Make sure you can afford everything you have put down.

Your competitors Edit

You will always have competition.

It is true that you may be selling something that no-one else is offering. It is also true that your clients only have a set amount of money every month to spend and that, at the end of each month, very little of it is left. You are going to have to convince them to spend a little less on your competitors and a little more on you.

To do this, you need to understand what makes your competition so attractive in the first place. What do they do right and what do they do wrong?

Walk into your competitors businesses. Pretend to shop. See how the staff and management treat you. Do you feel welcome? Would you be comfortable shopping there? Talk to the customers. Why are they shopping there? Were they recommended there by friends or have they had good experiences in the past? Be honest with yourself. Sometimes other businesses are actually good at what they do.

  • What major competitors will attract your clients' spending away from your products?
  • What prices and products do these companies have?
  • What makes them popular / unpopular?
  • What do they do to attract customers? Specials? Interesting marketing / advertising?
  • Which of your competitors stand out as being particularly good at what they do?
  • What are you going to do to stand out against them? What are you going to do that is more exciting / more interesting?

Marketing your business to your clients Edit

Never forget your clients. These are the people who are going to have to put their hands in their pockets and willingly part with their money for the things that you are going to sell. Without them you have no business.

What they think, how they think, is your problem. It isn't up to them to complain and help you run your business, any more than it is up to you to educate and pay for other people's children instead of your own. Your clients are worried about their own problems first, then yours.

They shouldn't have to come to you and tell you that your bread is stale or that you have run out of products or that your trolleys are broken. You have to make it as easy and as pleasurable as possible for people to spend the little money they have on your products. Their money is very important to them and they worry about wasting it on products that may not be perfect. You have a responsibility to them, not them to you.

Your clients are looking forwards into their own lives, not over their shoulders at what may be worrying you. Your job is to find out what makes them happy. You have friends and family to worry about what makes you happy. Clients only want to have a pleasurable buying experience.

Most people are aware that they have to compromise when they buy anything. If they buy the cheapest thing, it won't be the best quality. If they buy an expensive item instead of a cheaper one then they expect it to be a high quality item.

You must decide what sort of products you want to sell. If you sell cheap things then you have to sell a lot of them to make money since you will have very little profit on each item. There is also a greater chance of having direct competition with other people selling exactly the same products. If your competitors choose to earn less profit then you will loose clients.

If you decide to sell a higher quality product then you can charge more. You then have to ensure a higher quality because your clients will be extremely upset if you charge more but deliver a poor service. You are also going to sell fewer items and work harder to sell them.

There are good things and bad about each of these strategies. You have to decide which suits you.

  • What sort of people will buy your products and how important is product consistency to them (e.g. must every loaf of bread be identical)?
  • How seasonal or fashion-dependent are their buying habits (do they buy only in summer, only over Christmas, etc.)?
  • Do your clients want you to be the cheapest or the best (low price / low quality or high price / high quality)?
  • How do your clients decide where to buy your products? What sorts of advertising / promotions attract their interest?
  • Do your clients want you to always sell the same things in the same way, or do they want you to change all the time?
  • What will you do to attract your first clients (the most important and most difficult to get)? How much will it cost?

Give a great deal of thought to getting that first client. No-one wants to be the first to try a new restaurant or get their bathroom fixed by a brand new plumber. People buy by reputation or by recommendations from friends. What will you do to make sure that people have heard of you or that people will recommend you? Getting that first sale is vital.

Lastly, it is very important that people be able to remember you and find you easily. Choose a name for your business (you can even use your own name) that is memorable and allows you to stand out from all the other businesses. Make sure your name is visible wherever you are working and that your contact details are displayed so that people can find you easily.

  • What will you call your business? And why?

Your business inputs and outputs Edit

Every business has inputs and outputs. The inputs are the things you buy and the outputs are the things you sell.

You need to think carefully about who and where your inputs will come from. It is dangerous to rely on only one supplier since they may not always be available, or they may decide to raise their prices which can badly affect your business. Your business is also a client and, just as with your customers, you want a choice of products from a wide variety of suppliers to ensure you get a good deal.

Some suppliers will be critical. Maybe they are the only ones in your area. Maybe it is just too far to travel to get the variety you want. It is important to highlight these suppliers and to build a good relationship with them. It is also important to remember that your competitors will be in a similar position to you. If these critical suppliers run short of stock, or has a special on a particular item, it affects everyone in the same business as you.

You might want to think carefully about what you will do to be different so that a single critical supplier doesn't affect your business too much.

Some suppliers will offer you sales terms. They will allow you to pay later giving you an opportunity to sell the products before you have to pay for them. This improves your cash flow but does require that you take great care to ensure that you have the money to pay your supplier. Credit from suppliers is a tremendous responsibility and won't be offered to you right away.

You will have to earn the trust of your suppliers and maintain that trust.

  • List all of the inputs (products that are required to produce your products):
  • List all the suppliers for your inputs and their addresses, telephone numbers, and sales terms (cash, 30 days, etc.):
  • List all of your outputs (products created by your business):
  • What sort of prices can you charge and how much profit will you make on each item (a rough estimate)?
  • Do your outputs have a shelf-life? Must they be sold within a specified time limit before they go off / can't be sold? Which ones?

Setting up your business Edit

There are three phases in the life of a business:

  • Initial investigation
  • Setting up
  • Running it

We are still busy with the investigation (that is the purpose of this manual) but it is important to set down exactly how you are going to set the business up. Say you had the R 1 000 in your hand right now: what steps will you take today to be operating and making money tomorrow?

Costs are starting to become more and more important as we go on from here. Don't worry; we will deal with it simply and carefully. They are very important. Don't guess. Go and find out.

The worst thing that can happen is you commit to buying things, get half way and then discover a whole bunch of "hidden" costs. Sometimes sales people do try and disguise costs but it is your responsibility to find out exactly what it is that you are buying, how much it costs and what sort of post-purchase service you can expect.

  • List everything that needs to be done to prepare the business to be ready (list everything you need to have as well, both equipment and stock):
  • How long will it take to get all of these things and how much will they cost to get?
  • List all the fixed costs you will have to pay every month even if you sell nothing (things like rent, electricity, telephone, staff wages - including an allowance for the manager/owner salary):
  • Total amount for fixed costs: R_______________
  • How many staff will you need and how much will you have to pay each of them (wages must be included in the fixed costs above)?
  • What training will they need, how long will it take and how much will it cost? Even if you train them yourself there will still be costs.

Your manufacturing or production process Edit

No matter how small a business is it needs a standard set of procedures or methods for how its products will be produced and sold. Your clients will expect - most of all - that every product they buy from you will always be the same.

If you promise a client a cup of coffee they expect it to always taste the same. If you build a wall, clients expect it to be as good as your best effort. If you sew a shirt, it must be the same quality as the one your client saw a friend wearing.

The only way you can achieve this consistency is be detailing exactly, step-by-step, how each product is manufactured and produced. It is also important to have a set role for product control. Someone must be responsible for checking the products to ensure that they meet the standards that you are going to set out below.

You must also try and predict what could go wrong and what you're going to do about it. If you are dependent on a single sewing machine for your business, what will you do if it breaks? How much money must you keep in reserve for repairs? How long do those repairs take? Is there one you can hire in the mean time? What sort of maintenance program must you have to keep break downs to a minimum?

This is the heart of your business. It is what makes you work or fail. Draw pictures to show how different products relate to each other. Don't be afraid to ask for lots of help. Visit experts and spend time getting it right.

  • You still need to show other steps like: what happens if a client wants to return something. Each step can have a list detailing how to do it and what to do if anything goes wrong.
  • Allocate each of the manufacturing steps to a process and a process to a staff member (e.g. all manufacturing steps A to process 1):
  • What possible problems may happen during each step of the manufacturing process?
  • What solutions can you identify to these problems? How much will they cost and how long will they take to fix?
  • What is the maintenance program for all your equipment?
  • What safety requirements are important for production (if you're baking from home it is very important that children don't touch anything hot)?
  • How will you handle quality control and client feedback?

Your costing and bookkeeping Edit

Once you've spent most of your money on equipping yourself to sell things, you're going to have very little money left over for producing things to sell. Keeping those costs under control is one of the most important things in the business.

But let's put this in perspective. Business is not a perfect science. People run businesses. Businesses don't run people. And your accounts must be seen as a reflection of what happens in your business. It is a guide and you can decide how seriously to take that guide.

In the rush of handling everything that happens on a daily basis, things go wrong, mostly by accident. If you find yourself screaming at an employee about R 1.50 that went missing, then you have much bigger problems than simply keeping track of expenses. No amount of money is worth treating people badly. Your staff will start to resent you and the work they do.

If a staff member is deliberately stealing from you, then you must deal with it. If they made a genuine mistake, then you must decide whether it is important enough getting angry and risk losing someone who you have trained and committed time and energy to. Make sure you can tell the difference.

A business is more of a marathon than a sprint. You're not going to shout at a marathon runner over a few seconds. Don't sweat the small stuff. Be tolerant of all the people in your business; your clients, suppliers and - most especially - your staff. You too will have off days and get things wrong. On those days you're going to want your staff to smile and laugh with you, rather than resent you.

And the costing and bookkeeping? Well, that's just timekeeping. It is important to know where you are, how you're doing and whether you are successful. But it isn't going to make you profitable on its own. It just gives you a system to find out quickly how you're doing.

Costing is the process of working out what it costs you to buy/manufacture and sell your products. Your costs must include variable costs (like material, direct labour, etc.) and fixed costs (like salaries & wages, transport, rent, marketing, telephone and all the other fixed costs you identified in the section on setting up your business). Your gross profit (GP) margin must cover the fixed costs to break even. It is important to plan for profit. You only make money from selling enough products - each at a profit. Budget to make between 15-20% more margin than you fixed cost. That way you will ensure that you generate net profit. There is no other place to make money. You must ensure that you understand what every item costs.

Costing also leads to pricing. Pricing is part of the process of developing a strategy to decide what your product selling price must be. At the very least your selling price must be more than your cost price (variable portion of cost). The (Gross Profit) margin is the difference between your selling price and your cost price and the margin times the number of products sold, must cover your fixed costs to break even. Once this is ensured you must also decide whether you intend to be the best. If you charge more for your products, your margin could be higher, but you will probably sell less of them because they are more expensive. This gives you the time to make sure that your products really are the best. If you are the cheapest then you should sell more of them, but you must make sure you sell more. You will make very little margin on each item and it is only by selling high volumes that you can achieve the profits you want.

How you answer this depends on your abilities and your interests. Don't get trapped into being the cheapest by accident. If you sell only a small number of items with only a small profit on each you will soon find it impossible to stay in business.

Margins also don't have to be the same across your entire range of products.

In a coffee shop, coffee may cost only 20 cents to make while being sold for R 6 or more. Cakes may be sold for R 20 but each slice costs R 15 to sell. You will sell a lot more coffee than cake because it is "cheaper", but you will make good profits. Remember though, if you're going to sell coffee for R 6 it better be good. Bad coffee people can get at home.

Don't sell too many different products either. In a very small business it is important to only sell the most popular items and not be caught with too many products that don't sell at all. If products aren't sold then they tie up your cash and you will find it difficult to buy more of the most popular items.

It is easy to add in extra types of products later once your business is doing well. It is difficult to get rid of products that won't sell.

  • How many of each of your stock items do you think you can sell each day (and month)?
  • Will you be able to sell a similar number of each item each month, or is there seasonal variation (cold months, hot, or festivals)?
  • What sort of pricing strategy will you choose (cheapest or best)?
  • If you take your fixed costs, add 20% for profit and divide the total by the total number of products you will sell, what amount do you get? R _____________________

This amount is the average margin you need to put on the cost price of each item you sell to ensure that you make your target of being able to pay for everything each month and generate profit. You know what your competitors are charging for similar products (from your earlier investigation) and you know what your costs are. I you need to drop your price (and margin) to align with the market price, this will mean that you have to sell bidder volumes or reduce you fixed cost.

What happens if you don't sell that many items? You need to increase the margin in case this happens. Double it. Remember you can change this margin on each different product to get your prices in line with what your customers are prepared to pay.

  • Write down your new margin: R___________________________________
  • Write down the cost prices plus the margin for each stock item you will sell:
  • Are you still competitive? Do you need to adjust the margins? Write the adjustments down:
  • Now, set yourself a target. How many items for each product do you need to sell on a daily (and monthly) basis to be profitable?

You will now develop a forecasted cash flow for a typical month based on the targets you set yourself. Convert your target to cash by multiplying the number of items you will sell by the selling price of each item.

We will use the example of a sandwich seller who makes four types of sandwiches. She doesn't sell them every day (she works five days a week selling sandwiches at a taxi rank). If she runs her business on her own and makes all the sandwiches each morning, then goes out and sells them, her fixed expenses will be quite low. Say they come to R 80 per day. Her research tells her she can sell 50 sandwiches a day. She thinks that 30 is a good number to set as a target. This means her margin must average about R 3.50 a sandwich (R80 + R20 profit = R 100. R100 ˜ 30 = R 3.33 which she then rounds up).


Item

Daily Target

Monthly Target

Cost Price

Margin

Selling Price

Total per Month

Item A

Cheese Sandwich

Chicken Sandwich

Roast Beef

Polony Sandwich

X

10

5

3

12

X x 5 days x 4 weeks

200

100

60

240

R y.yy

R 5.50

R 8.50

R 10.50

R 5.00

R z.zz

R 3.00

R 5.00

R 6.00

R 2.50

R y.yy + R z.zz

R 8.50

R 13.50

R 16.50

R 7.50

= monthly target x selling price

R 1 700

R 1 350

R 990

R 1 800


You will note that she doesn't keep the same margin for all her different sandwiches. Her cheese sandwich has a margin of R 3, while her chicken sandwich has a margin of R 5. She does this because she will sell more of the lower priced sandwiches and fewer of the higher priced ones. At 10 sandwiches a day and R 3 a sandwich, she makes R 30 gross profit on the cheese sandwiches. At 3 sandwiches a day and R 6 per roast beef sandwich she makes R 18. Chicken and roast beef sandwiches are harder to make so she feels justified in charging more for them. She also wants people to know that these are better sandwiches than the cheap polony ones - otherwise her clients might think she is using low-grade meat. She isn't making as much money on the roast beef product range but she can't charge more or it will be too expensive for her clients.

Her turnover (the total of all the incomes from all the different products) was R 5 840. Her total expenses purchasing all the sandwich material was R 3 780. So she looks as if she made a gross profit of R 2 060. (This is the gross profit, before fixed costs.)

Her total monthly expenses are R 80 x 20 working days (= R 1 600 per month). In reality she made a net profit of R 460 for the month. This isn't a lot. She either has to increase her prices, or sell more sandwiches. Note that the gross profit from any extra sandwiches sold, is 100% net profit. She has already paid for all her fixed costs from the margin on the sandwiches sold to this point. The margin on the extra sandwiches is not needed to pay for fixed costs and so is a real additional profit. If she sold just one extra chicken sandwich a day (i.e. 1 in a day, 20 in a month), she would make an extra R 100 net profit a month.

The prices you charge for your products are limited by what your clients are prepared to pay. Whatever they are willing to pay is acceptable. If you try and charge them much less than they expect, then they might not want to buy because they will think the product is not good quality. It is "too" cheap. If you try and charge too much then they can't afford it.

If you have to charge much more than your clients are willing to pay just to cover your expenses then you probably can't sell that product and need to find another one that they can afford and that will still allow you to make a profit. Your targets are the absolute minimum number of products that you need to sell to cover all your expenses. You really want to sell much more.

We will now present a projected cash flow for the sandwich business for a typical month. This is what our sandwich seller thinks that a month will look like. We don't actually know, but we have to make a guess so that we know how to plan our finances and our time.

You won't be spending all your time selling. Supplies need to be bought, bills need to be paid, products need to be made and transported. Only then are you ready to sell.

Each transaction happens on a specific day, and must be detailed. Say who you bought from and what you bought, or who you paid and what you paid for. The reference is to the number of the invoice you received or gave a client. You may have to look this up if there is a dispute and this is the first place you will look. You will also want to list the things you buy or sell regularly so that you can track them and see how popular they are or if they are costing you too much. Your projections must be an accurate reflection of what is likely to happen in a real month so the more detail the better. Let us look at our sandwich business as an example and create a set of projections for what we think might happen over a few days of trading:

Income for typical month in 2005:


Date

Details of transaction

Reference

Cheese

Chicken

Beef

Polony

   

Other

Total

01/01

02/01

03/01

Ö

Site C taxi rank

Site C taxi rank

Site C taxi rank

-

-

-

85.00

93.50

102.00

54.00

67.50

54.00

33.00

49.50

33.00

120.00

105.00

90.00

   

-

-

-

292.00

315.50

279.00

 

Totals

 

280.50

175.50

115.50

315.00

   

-

886.50


Expenses for typical month in 2005


Date

Details of transaction

Reference

Travel

Beef

Chicken

Cheese

Bread

Polony

Other

Total

01/01

02/01

03/01

Taxi fare to go shopping

Blue Ribbon, 15 loaves

Shoprite, sandwich filling

Mr Marks, rent for taxi rank

Taxi fare to town to pay rent

Cell C, prepay for telephone

-

Inv. 4331

Inv. A321

Inv. 913

Inv. 724

15.00

15.00

50.00

30.00

40.00

75.00

40.00

500.00

40.00

15.00

75.00

160.00

500.00

15.00

40.00

 

Totals

 

30.00

50.00

30.00

40.00

75.00

40.00

540.00

805.00


Now we can try and read information from these accounts. Your expenses seem to gang up on you. Everyone wants to be paid at either the beginning or the end of each month, but your clients are going to pay you in small amounts each day. You need to have enough money so that you can pay your expenses ahead and then wait for money to come in. The more detail you put in the better. If you find that we have not given you enough columns in this book, then make your own sheet and keep a good record.

At the end of each month you must transfer these totals across to a journal that details everything that happens in the whole year. The table below is a projection for income and expenses throughout one year of trading. When we produce our actual accounts we can compare it to this and see how we did.


 

Jan

Feb

March

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Total

Opening Bank Balance

1000

                     

1000

Income:

                         

Total Sales

4900

5100

5500

6500

6500

7000

7500

7000

7000

7000

7000

7500

78500

Total Purchases

3161

3290

3548

4194

4194

4516

4838

4516

4516

4516

4516

4838

50643

Bread

Cheese

Chicken

Beef

Polony

633

632

632

632

632

658

658

658

658

658

712

709

709

709

709

842

838

838

838

838

842

838

838

838

838

904

903

903

903

903

970

967

967

967

967

904

903

903

903

903

904

903

903

903

903

904

903

903

903

903

904

903

903

903

903

970

967

967

967

967

10147

10124

10124

10124

10124

Gross Income

1739

1810

1952

2306

2306

2484

2662

2484

2484

2484

2484

2662

27857

Expenses:

                         

Total Expenses

2030

2030

2030

2030

2030

2030

2030

2030

2030

2030

2030

2030

24360

Rent

Transport

Telephone

Electricity

Salaries & Wages

Other (interest, etc.)

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

500

500

100

30

800

100

6000

6000

1200

360

9600

1200

Other income

                         

Other expenses

                         

Net profit

-291

-220

-78

276

276

454

632

354

454

454

454

632

3497

Income Tax

                         

Loan repayment

100

100

100

100

100

100

100

100

100

100

100

100

1200

Running total

609

289

111

287

463

817

1349

1703

2057

2411

2765

3297

3297


You can analyse this as well. See how the business started off slowly. Then there was a nice jump in July because it's winter and people are hungry. Then another jump in December because it's Christmas and people get their bonuses. You can also see how the R 1 000 was spent to finance the losses in the first few months (we assume that a sandwich business doesn't have many start up costs).

  • Now try for yourself. Set out your products, costs, margins and selling prices:


Item

Daily Target

Monthly Target

Cost Price

Margin

Selling Price

Total per Month

Item A

X

X x number of working days in a month

R y.yy

R z.zz

R y.yy + R z.zz

= monthly target x selling price

  • What trends have you included in your projections? Why have you put them there?

The numbers you have put down here are your best guess about what will happen. Be as honest as you can and don't try and make the sales bigger or the expenses less than you believe is possible. After all, if you're lying to yourself, you are only setting yourself up for a very miserable time. How are you planning to pay for this? You only have R 1 000.

In the second part of this manual we will have forms for you to fill in for the actual figures. Then you can compare your actual sales to your targets and see how accurate you were.

A last comment. You will note that we have not discussed offering credit terms to any of your clients. You are unlikely to receive credit from your suppliers until you have built up a good track record with them. This is only fair as they don't know you or your spending habits. The same is true of your clients. This is especially hard when friends or family come to ask for credit.

Your R 1 000 won't go very far if cash is owed to you by other people. Credit is not recommended. Ask yourself a simple question: if the credit you offer were not to be repaid, could you afford to take the loss?

Running your business Edit

You have now completed most of the planning necessary to start your business. We have only a few more things to do. Now you have to start thinking about the routines of running a business.

Much of what you do is entirely predictable. What can go wrong is also predictable. If you have a shop you probably only have two sets of keys. One for you and one for your other staff members. If you are sick, who will open in the mornings and close in the evenings? If a set of keys goes missing and the other set is far away, what will you do? And this is just for a set of keys.

If you consider all the different steps in running your production cycle you can imagine how many different things can go wrong. Your clients aren't interested in your problems. If they come in to get their television set fixed they don't care that your car broke down, or that the supplier was out of stock, or about any of the other things that might have gone wrong. All they care about is that it cost them money to come to you, they had to take time off work, or miss something important, just so they could come see you. Worse, they will blame you for their broken television, even though it wasn't your fault. You better have a plan for when something like this happens. Because it will.

The fastest way to make your clients angry is to pretend that no problem exists or to lie to them. The fastest way to calm them down is to be brave and accept responsibility. If you are shouting at someone and they stand up, look you in the eye and say, "I apologise. It is entirely my fault. How can I make it up to you?" it is very hard to stay angry with them. Sure it's difficult to do this, but this is part of running your own business.

  • What is the process for running your business on a typical day? Who will be responsible for each step? Link this back to the production process.
  • Who will act as backup should the person responsible not be there? What do they need to act as backup?
  • What weekly processes need to be performed? Who is responsible, who is backup and what tools are required?
  • What monthly processes need to be performed? Who is responsible, who is backup and what tools are required?
  • What is the schedule for training and motivating staff?
  • What processes are required for maintenance and new product creation? Who is responsible and what tools do they need?

The more systems you have to look after the predictable things, the better motivated your staff are, since you will be giving them responsibility. It is also easier for you to concentrate on the unpredictable things knowing that there is a plan for dealing with everything else. Most importantly, that plan is written down.

If you are the only person running that business and you get sick, you could lose all your clients. But if you have a friend or relative then you can show them this manual and say, "It's all in there; this is the documentation for everything. Just follow the instructions and you will be fine."

Things go wrong. And even if they don't. You might just want a day off once a year to spend time with friends or family.

Before you begin Edit

You're almost there. Just a few last points to remember. These are your "hot" pages. You'll come back to them to refresh your memory and for reference.

There are probably also some laws you need to obey and you should keep in mind. It will all come in handy.

  • List the names and telephone numbers of your suppliers (including your landlord) and what you buy from them
  • List the names and telephone numbers of some important clients and what they buy from you
  • List all of your main products according to the following headings
    • Sales Items
    • Cost Price
    • Selling Price
    • Target Sales Volume
  • List some of the support services available to you (legal, business and other) that you might need:
  • What are the major laws you need to worry about, and which government departments should you call to keep up to date (list phone numbers)?

Your first day Edit

Your first day is the most important. The way you approach it will influence how you feel for months to come. If you have a bad first day, then - as hard as this sounds - pick yourself up and make sure tomorrow is your first day.

There is nothing worse than standing around with your products in your hands watching people walk past without paying any attention to you.

It is up to you to attract their attention. They have other things to worry about. You must be noticeable.

There are lots of things you can do.

Point 1: Give stuff away

You may be asked, "Why, when I'm trying to make money, should I give some of my products away?" People are naturally nervous of new things. They don't know anything about you, or, they may know you but not know your products. Let them have a little taste. Not a lot. Just a little.

Let them have a small piece of vetkoek. Paint your house and put a sign up telling people that you're a painter. Offer to carry their first parcel for free.

Whatever you do, it mustn't cost too much and it must leave people asking for more.

Point 2: Make sure they can find you

Sometimes it's obvious stuff such as being visible. If you don't have a big sign up, or a special uniform that makes you look different from other people, how can they see you? If you don't have your phone number available and working, how can they call?

Point 3: Be brave

It won't help to be afraid. Go and talk to people. Knock on doors, introduce yourself, explain what you do. Be helpful, be present, be courteous.

Most people won't be interested, but some people will buy. You may think, "I spoke to 50 people today but only one person bought." That is one more person than if you spoke to no-one.

Point 4: Deliver on what you promise

After all the hard work you have done to get to this point you will be betraying yourself if you offer a poor quality product. Your clients will be extremely unhappy if you promise one thing and deliver another.

Your best advertising comes from other people. If they're happy, they'll go and tell their friends all about you. If they're not, they'll still go and tell all their friends about you and about how terrible you are.

Point 5: Keep track of information

Don't forget what you're doing. Keep records and notes. You will meet lots of people, both suppliers and clients. You will ask for things and promise things. There will be a lot going on and it will be easy to forget something important.

Make sure you write it all down. If it is very important, make sure the person who promises you - or who you promise - signs your records to show that they agree with what was promised. Carry a small notebook and a pen and use them regularly.

Your records become the best way of keeping track of how your business is doing and whether you are making a profit. If you track your sales you can see in advance if you need to make a special effort, or if you are running out of money. Then you can make a plan. It is too late to do anything once your money has run out and people turn up expecting to be paid.

Just as important is to know if you are starting to do very well. If you are selling far more products than you expected, then you may have to find extra money to pay for the growth. You might have to buy additional manufacturing equipment, or hire more staff. If you don't have money, or don't know where to get it, then you can't. Again, you need to know in advance.

Keeping records Edit

The following sections provide guides on how to track information. You will need to make copies of these pages. Each section is explained below.

Part 1: Daily records Edit

There are four sets of records to keep here: income, expenses, stock purchased, stock sold.

For income and expenses you should keep a little notebook and simply keep a record of each transaction (either spending or receiving money). Always ensure that the details you write down are meaningful to you so that you can remember what it is that happened should you need to look it up.

The stock control records are a little more complex. There is overlap with the income and expenses records. You are spending money to buy stock and you are getting money when you sell that stock. The most complete record will still be your income and expense daily record. The stock control records are to keep track of what you have on hand, what you've spent and what you've used up. Most importantly you want to keep your waste and actual losses of stock to a minimum.

If we go back to our sandwich example: some of those sandwiches will go stale before they are sold, and can't be given to customers; some of those sandwiches may even be stolen. If you know how much stock you bought, then you should know how many sandwiches you can make. If you discover that you are making fewer sandwiches than you should have, based on the materials you bought (bread and filling), then there is a problem. It could be that the bread was left out in the sun and went stale. Or that someone stole some of the chicken. You won't know any of this unless you are keeping track of what you think should be there compared to what is actually there.

The stock control records allow you to keep a running total of everything that you have purchased, and everything that you expect to sell.


Daily expense report for my business:

Date

Expense Details

Reference

Amount

       

Daily income report for my business:

Date

Income Details

Reference

Amount

       

Daily stock purchases report for my business:

Date

Stock Purchases Details

Value

Number

Used

Wasted

Total

Missing

               

Daily stock sales report for my business:

Date

Stock Sales Details

Value

Number

Sold

Wasted

Total

Missing

               

Part 2: Monthly and Yearly Records, and Target Reports Edit

There is a lot of information in the previous four types of records and it is difficult to make sense of it. It is also hard to spot trends to see whether you should be stocking up or reducing your inventory.

If you see that your sales are going down of a particular product then you can take steps to stop making it, or to change it to something more interesting. If you don't know, then you'll keep producing the same item which you are then unable to sell. The same is true of popular items. If you don't have enough and there is a lot of demand then you are missing out on sales and you may be encouraging your competitors.

Your monthly and yearly journals will look similar to the ones you used to produce your projections.

A new report is the Target Variance Report. This is a record to allow you to analyse whether you are making the sales you hoped for. Earlier you set targets for each product. These were the minimum number you needed to sell to cover all your expenses. The terms used in the variance reports are:

  • Target: this is the number of units of any product that you set yourself to sell
  • Actual: this is the actual number of units you sold of that product
  • Variance: this is the Actual - Target

If your Target is bigger than your Actual you will get a negative number; this means you didn't sell enough.

There is only one page for the monthly sales variance report, but you will need to make a copy of that page for every one of your products. The Actual totals for the variance report come from your stock control reports. All you are doing is consolidating the information into one place.

It is essential to keep control of your stock. If you think of your sales items as little bundles of money, instead of as shirts or sandwiches or paint, then you can see how important it is to know where everything is.

During this process you should still keep in touch with your advisor or mentor. Show them how your business is doing. Let them see the records and advise you on what they think. It is also useful to get a professional bookkeeper to assist you once the business gets quite big as you will then have less time to do everything yourself.

Remember, the more records you keep the better. And, no matter how many records you keep, if you can't find them, they're no good to you.

Income for _________________ (month) for my business:

Date

Details of transaction

Reference

       

Other

Total

                 
 

Totals

             


Expenses for _______________ (month) for my business:

Date

Details of transaction

Reference

       

Other

Total

                 
 

Totals

             

Annual journal for my business:

 

Jan

Feb

March

April

May

June

July

Aug

Sept

Oct

Nov

Dec

Total

Opening Bank Balance

                         

Income:

                         

Total Sales

                         

Total Purchases

                         
                           

Gross Income

                         

Expenses:

                         

Total Expenses

                         

Rent

Transport

Telephone

Electricity

Salaries & Wages

Security

Insurance

Other

                         

Other income

                         

Other expenses

                         

Net profit

                         

Income Tax

                         

Loan repayment

                         

Running total

                         

Before you go Edit

The only thing that is consistent is that people change their minds.

The products that you are selling well and with great confidence today may not be as popular tomorrow. The various reports in the previous section allow you to keep track of what you are doing and what you need to do in the future. If the sale of one stock goes down, while another goes up, you must ensure that you reduce purchasing of the one, and increase that of the other.

You may think that it will be easy to simply remember what you need to do. There are so many things that happen in a business every day that you need to think about and deal with. Don't force yourself to also have to remember everything as well. It is much easier to keep records and have something to refer back to than to have to remember what stock needs purchasing and how you promised to run your business.

By having gone through this process you have given yourself a tremendous advantage. Business is difficult. There are good days and bad.

As long as you remember to keep learning - to keep asking your clients what it is that they want from you - then you will always have something to sell that people will pay money for. Go back to the beginning of this work book and continuously check that your information is always up to date.

Business is a promise. You promise your customers that you will sell them a product that they want and which will be reliable and useful to them. They promise to pay you. If you keep your promise you have every right to hold them to theirs. If you don't, you will get into all sorts of trouble.

Good luck, keep learning and have fun.

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