How to Deal With Your Competitors Professionally

In today’s competitive world, every business has competition, and if you do not have, one will show up as soon as you start to operate. For any small business owner, competition is a reality and you must thus be prepared to compete and win. To get a clear perspective of the game, let’s pose and ask; who is your competitor? Your competitors are companies that satisfy the same customer need as your company.

Read more on How to Deal With Your Competitors Professionally

5 Ways to control Money for a Small Business

Cash flow management is every entrepreneur’s nightmare!

Even for the financially astute, it is one of the toughest challenges every small business owner faces.

Small businesses that fail to manage cash flow well, place their long term success and continuance in grave, grave danger.

A new article by business development expert Patrick Juma outlines five ways to control your cash »»

Assistance to Micro and Small Enterprises Programme (ASMEP) - Call for Proposals

The Assistance to Micro and Small Enterprises Programme [ASMEP] is calling for proposals to support Kenyan women entrepreneurs participate in business opportunity enhancing Workshops/Conferences. Read more »»

Youth entrepreneurs - Doing Small Business in Big Ways!

This publication provides an update on the Youth Interactive Portal for Enterprise’s  progress towards levelling the playing field for youth-led enterprises in East Africa. 

These diverse stories of young entrepreneurs from Kenya, Uganda and Rwanda provide compelling reading and advice on how to do business as a youth in East Africa.

It matters not whether the entrepreneurs are engaged in manufacturing, software development or stationery retailing, their primary motivations are not just financial security but to make a long lasting positive impact not only in their communities but throughout their countries as well as globally.

The common thread running through these profiles is that these young people found a gap in the market and are exploiting it.

Indeed all of them are Doing Small Business in Big Ways!

Download Get Inspired! Vol. I - Doing small business in Big Ways!

The Cost of Red Tape for East Africa Business

A study on businesses in Rwanda titled “Cutting The Cost Of Red Tape for business growth in Rwanda” based on a country-wide sample of more than 400 businesses found that regulatory compliance imposes significant costs on local businesses and on the economy as a whole. Overall, the study reported that red tape cost businesses in the formal sector at least RwF 55 billion, equating to approximately three per cent of GDP.

Tax compliance was found by 53% of the surveyed businesses to be the most problematic regulatory area in terms of the time consumed in navigating troublesome regulations. These included preparation of paperwork for tax audits.

Just this week the Kenya Revenue Authority announced that tax returns would now be online, reducing the need to visit the tax offices in person – which, for many businesses, means that someone has to stand in frustrating long queues to file returns and make VAT payments. For most micro-entrepreneurs, such visits mean closure during business hours. translating into further loss of revenue. As the Rwanda red-tape survey states, “standing in one of those queues, with our business on hold, it is hard not to think that regulations are a waste of time – simply ‘red tape’ and nothing more”.

Other hindrances to tax and business regulation compliance include poor customer service from unhelpful public officers, as well as the slow pace of processing forms. Other indirect obstacles include the high costs of public transport, making visits to these offices higher in opportunity costs.

When applying for public utilities such as water and electricity, the need to visit various departments in order to complete company requirements also act as a disincentive, when weighed against profits if the business owner remains at work in their business premises. It thus becomes more attractive to pay for illegal connections than waste time and money moving from one office to another checking the status of one’s status of their connection applications.

For businesses involved in exports, the paperwork requirements are both numerous and complicated. This again turns out to be costly in terms of time. Furthermore, the requirement that each consignment has to be verified by standards bureau’s in turn act as a disincentive to comply with existing rules.

And although Kenya’s President Kibaki ordered that the Kenya Ports Authority operates 24 hours, there still remain substantial delays at Customs for clearing and forwarding agents. These delays are felt not only in terms of time spent, but also involve direct expenses having to be paid to transport companies for the waiting time of their trucks and drivers awaiting clearance. According to the Rwanda survey, some businesses said that delays from Customs in some cases resulted in them losing clients.

There is also lack of clarity about products that fall under tax exemption status. Unfortunately tax regulations offer various interpretations within their exempt goods brackets. Licensing of goods is also mired in misunderstanding as well as long delays in obtaining the necessary approvals. A recent example regards the introduction of bans on certain plastic bags where even larger retail enterprises queried the exact plastic weight of bags that were banned.

The cost of red-tape

Compliance costs are of two types: one-off costs, such as the costs associated with initial business registration and recurring costs, which arise on a regular basis.

In the Rwanda survey, the overall total regulatory costs for the Rwandan economy amounted to at least RwF 55 billion per annum. The majority of these costs were spent on complying with tax regulations (33.8%) followed by costs of complying with export requirements including delays (33.6%).

Tax compliance was found to affect micro-entrepreneurs as much as large companies. For instance in the Rwanda red-tape survey, there was a difference of 15% in the responses of enterprises with over 100 employees and those employing less than 5.

Business registration procedures were most felt by businesses employing less than 10 employees, with temporary interruptions by having to close the businesses in order to comply with regulations being cited most. According to the 2005 Human Development Index Report titled “Aid, Trade and Security in an unequal world” on average the cost of starting a business in sub-Saharan Africa is 224% of the average national income, compared with 45% in South Asia. This factor keeps many entrepreneurs in the informal sector in order to survive.

To comply with red-tape costs, firms are often forced to pass on these costs onto their customers, which in turn have economy-wide knock on effects. For business startups this makes marketing their products and services doubly onerous. Ultimately the government loses revenue and taxpayers may face higher rates as a result of the government seeking to recoup lost revenue from registered businesses.

Higher taxation results in businesses not disclosing full information with regard to income and/or number of employees in order to avoid higher penalties. This in turn sometimes results in employee layoffs as a way to mitigate reduced earnings.

High tariffs on imports also lead to smuggling by unscrupulous entrepreneurs, who often have set up rings where they receive tip-offs of impending raids and offer bribes to evade prosecution. This leads to law-abiding entrepreneurs to exit the market as they are unable to compete on an equal basis with such enterprises.

Even VAT, the most common tax acts as a disincentive to registered enterprises. Businesses are required to pay VAT when they order supplies of inputs, but they often experience a considerable delay between paying the VAT and receiving payment from their customers for the goods or services provided. When combined with the costs of actually buying raw inputs in the first instance, this forces small business to operate with very little working capital.

Reducing the costs of red-tape frees up resources for more productive activities as well as spurring wider economic growth. Thus it is imperative for economic reforms to focus on regulatory and administrative environments that act as the foundation of business-friendly policies thereby stimulating trade and attracting more people to venture into entrepreneurship.

For starters as regards micro-entrepreneurs simplifying procedures that reduce the need for in-person interactions are a first step in the right direction. As seen from the increase in mobile phone cash transfers and banking, revenue and regulatory authorities can also harness these tools. This move should also encourage more entrepreneurs to comply, as well as reduce unnecessary delays in business.

Serious questions for any entrepreneur

"Now is the time to put aside your fantasies, and take a hard look at who you really are..." - Martin Zwilling

Martin Zwilling's blog Startup Professionals poses several questions that any entrepreneur regardless of age and how large (or small) their business is should critically ask themselves.

Read "Not Everyone is an Entrepreneur" and decide whether YOU are really cut out to be an entrepreneur.

If the Kenya government was a business, it would have collapsed ages ago

"Why would a company hire someone that sleeps on the job, doesn’t complete assigned tasks and demands a hefty untaxed salary?" - Ken M. a Kenyan Entrepreneur, 16th March 2009

The global financial crisis has led to the closing down of many enterprises. Even the Business Daily today in its headline article “Global crisis wipes out call centre jobs” tells of the local BPO industry as being in jeopardy.

Recession-proofing

Indeed “recession-proofing” business has become a buzz word, even amongst local entrepreneurs. Key in the phrase on Google and you get a result of 4,790,000 website listings.

Ensuring that one’s business can swim the tide of global financial currents, means tightening belts, something that many companies are doing as seen in the number of industries laying off non-essential staff.

In line with this economic outlook, wouldn’t it also be prudent for the government that lives off earnings in the form of tax revenue from Kenyans also tighten its belt?

News stories such as lavish spending on tea and flowers are definitely not in tune with the times.

Mars Group Kenya, a local governance and accountability watchdog in a blog posted today “The Government of Kenya is Broke” has raised critical financial management inefficiencies being perpetrated with outright disregard to the Kenyan people. This coming at a time when the same government (which previously prided itself on being self-sufficient) has whipped out the begging bowl for donors to fill.

Scandals ranging from maize to oil continue unabated, whilst we business people are warned of imminent tax hikes. The grand coalition government seems to have a more voracious appetite in ensuring its parliamentarians are kept in the lap of luxury, whilst continuing to exert pressure on small businesses to pay taxes.

The Mars Group blog outlines several spending issues that if the Kenya government was a business, it would surely collapse.

For instance, the bloated cabinet of 93 Ministers and Assistant Ministers costs Kenyans billions of shillings annually. Out of the government’s budget, 24% goes to servicing external debt leaving 76% for services rendered to Kenya. Out of this balance, 85% is spent on recurrent expenditure (i.e. paying hefty salaries and buying the latest SUV’s) whilst only 15% is left for development.

It is this 15% of expenditure that is supposed to ensure that all Kenyans reach a point of financial stability, in order to pay (“as responsible citizens”) taxes.

One does not have to be an economist, accountant or even a high school student for that matter, to see that the flow of funds here is top heavy; whilst unfortunately it is small business entrepreneurs and lower income Kenyans consumers who bear the brunt of this parasitic government. Taxes such as VAT know no class barrier, thus we “watu wadogo” pay the same taxes as MPs who earn tax free allowances topping up high salaries.

No-brainer questions

The Mars Group blog proposes several reforms, which if given in advice to small business owners would seem a no-brainer: For instance,

• Why would a company have a bloated Board of Directors (i.e. cabinet) whilst revenues remain small?
• Why would a company hire someone that sleeps on the job, doesn’t complete assigned tasks and demands a hefty salary (untaxed!)? (our MPs).
• Why would a business owner retain the services of a financial officer when it turns out that money allocated for specific tasks (such as paying for free education) is diverted for other costs (such as buying maize)?
• How on learning that money has been siphoned out of the enterprise (Anglo-leasing style) by the same finance officer, would the business owner just let the matter drop; notwithstanding the fact that annually 24% of the business budget is religiously paid to external lenders?
• After finding out about the siphoning of funds, wouldn’t a prudent business owner ensure that such corrupt loans cease to be paid immediately?
• Wouldn’t an entrepreneur use legal redress so that the business doesn’t have to pay the corrupt loans?

Either way, remaining in the status quo would without a doubt crush the business before too long. The government is only lucky in that it gets free money from taxes without even having to pretend to offer adequate services.

That is until we finally demand that the government also tightens its belt.

Read THE GOVERNMENT OF KENYA IS BROKE: What Mwai Kibaki, Raila Odinga, and Parliament must do to deal with our current financial crisis

HIV/AIDS affects more than just the bottom line

A UNAIDS study in the year 2000 on the impact of HIV/AIDS on the Kenya predicted that the scourge would leave the Kenyan economy one-sixth smaller than it would have been in the absence of HIV/AIDS. Well, the pandemic has wreaked more havoc both on the economy as well as business.

Not only has the scourge adversely affected productivity and costs, but HIV/AIDS continues to have an invidious effect that is unquantifiable but yet profoundly impacts on enterprise.

Absenteeism is usually the first and most common impact on business productivity. The number of days an employee reports to work can be measured, but this can also be a trigger for discord in labour relations when other healthy workers have to shoulder the responsibilities of the absentee.

The next impact is usually a loss of vital skills, which in turn makes entrepreneurs hesitant in investing in training their employees. Most times, when a small business owner sponsors an employee to training they also expect that this employee will act as some sort of champion of the newly learnt skills or knowledge spreading it amongst the other employees. Thus the loss caused by AIDS doesn’t just end with the illness or death of that employee.

Finally there is the emergence of a loss of morale amongst the other staff members. What else can you expect when attending funerals of colleagues and their family members becomes a common event.

On World AIDS Day, the National AIDS Control Council should salute small businesses that take measures to protect their workers who are uninfected, whilst offering appropriate support and services to those who are infected. These are the entrepreneurs who are on the front-line fighting the scourge that threatens to shrink and sink the economy.

The government on its part could also provide incentives to small business entrepreneurs by introducing tax incentives for greater involvement in AIDS prevention.

Opening the public procurement door to the small business entrepreneur

It has now become recognised that an important catalyst to business growth is enabling entrepreneurs to compete on the public procurement market.

Government is by far the biggest consumer of goods and services in any economy. Unfortunately, most small business enterprises are locked out of the public procurement system.

However with the current financial crises causing huge job losses, the need to make it easier for small businesses to win government contracts and thus protect jobs has gained in prominence.

In the UK where just today one of the largest employers British Telecom announced 10,000 job losses, the conservative party has also put the necessity for small businesses to competitively bid for government tenders on their agenda. The party has developed an action plan that calls for Whitehall to open up the massive £125 billion government procurement budget to small and medium firms across the country.

Other small business enabling action items include calling for the scrapping of a rule requiring companies to provide three years of audited accounts when bidding for contracts. This regulation acts as a barrier to startups simply because they may not have been in operation for three years.

They are also calling for the introduction of a single questionnaire to bid for government contracts worth less than £50,000. This would only have to be filled in once and logged for future contract bids. This process would radically reduce the administrative burden involved in bidding for government contracts.

Publicising tenders by requiring that all contracts over £10,000 be published online should also increase the number of entrepreneurs who find out about such procurement opportunities.

Finally, in line with the United States Small Business Administration, the conservatives are aiming for 25% of public contracts to be awarded to small and medium enterprises. This in their view would help to overcome the risk aversion that leads many entrepreneurs to overlook government contracts.

Trade Assistant Minister Omingo Magara during the launch of preparations for Global Entrepreneurship week (slated to begin on 17th November) said that his ministry was seeking ways in which to encourage and enable local entrepreneurs to compete on the public procurement market. The conservatives action plan would go a long way in achieving this.

Youth Fund: it is not enough just to open the gates of opportunity

“You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, ‘You are free to compete with all the others,’ and still justly believe that you have been completely fair… it is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates. This is the next and more profound stage…” - President Lyndon Johnson.

Teething problems in both the youth and women enterprise development funds have emerged. This week, no less than the Planning Minister Wycliffe Oparanya was urging financial intermediaries to relax their requirements for youths seeking to cash in on the enterprise fund loans.

Recently, the minister for Gender and Children Affairs, Esther Murugi had also expressed concern that over Sh700 million meant for women projects had not been disbursed.

Water, water everywhere and not a drop to drink!

It seems that there is so much money available but the means of accessing it are dead ends. In common parlance: money, money everywhere, but no way to get it in the pocket.

As long as these funds rely on financial intermediaries, they will continue to have problems of their target populations being unable to access these funds.

After all these intermediaries are banks, and banks are in the business of giving loans whilst enforcing conditions and requirements that make it difficult for the person taking the loan to default. So, without any culture change in the banking fraternity, you can still expect the loan officer in the bank to ensure that the youth or woman entrepreneur has a viable business that will pay back the loan. This will happen regardless of whether the government wants to throw the money at these people. If that is how they will measure their performance in terms of beneficiaries of loans, then we suggest that they put a desk in front of the Kenyatta International Conference Centre (KICC) and give loans to any Tom, Ochieng or Wanjiku who happens to be strolling past them.

Both the youth and gender ministries should not feel toothless if they cannot reach their stipulated number of entrepreneurs. They also must remember that small business owners have a natural aversion to exposing their business to risk, and thus are hesitant to take out loans.

In seeking funds, small business owners tend to use what can be described as the ‘pecking order’ model. This suggests that entrepreneur’s attitude towards and use of financial sources are most positive towards first, internally generated equity (for instance injecting own savings into the enterprise), followed by debt financing from sources such as banks.

Small business entrepreneurs also prefer sources of finance associated with the least information asymmetry. It is easier to approach your brother for a startup loan than it is to wade through the rigorous formalities of a bank loan. For one, you need a fully developed business plan, something not many people in business have. This requirement is also asked for when seeking finance from the youth and women’s funds.

There is also the ‘theory of the discouraged borrowers’ (Kon and Storey, 2003) which posits that some existing small business owners believe they will not be successful in obtaining external finance and therefore do not apply.

Apart from a shyness in opening oneself to be asked confidential questions on one’s business, there is also the overriding need to maintain control of one’s business. Thus such firms prefer using retained profits and cash flow to fund their business development, rather than opening up themselves to losing control of their enterprise. This is why seeking capital from personal savings or other informal sources (such as family and friends) is the preferred option for entrepreneurs who seek to minimize intrusion into their businesses.

The emergence of the micro finance sector has somewhat filled in this gap as a particular type of informal finance that takes the form of a small loan to individuals. However, as can be seen from the rapid growth of Equity, Family and K-REP Banks, these institutions have now outgrown this approach and their operations are now more akin to commercial banks than the informal micro-finance.

So instead of forcing entrepreneurs to take their money, the two funds can actually reach more enterprises if they become innovative in assisting existing small business owners to expand their businesses.

Apart from solely financing entrepreneurs, the funds could have more impact if they were in a position to expand business opportunities by providing collateral support, mentorship and technical assistance, which are lacking or too expensive for many small enterprise owners.

Loan guarantees can assist entrepreneurs with the potential for success but lack the current capacity to qualify for conventional bank loans to access more funds than are currently available within the funds. This will enable such businesses to expand so they can achieve the economies of scale that are necessary to compete with larger businesses.

Both fund managers can also learn lessons from the US Small Business Administration (SBA). Innovatively this independent agency is mandated to enter into contracts with Federal (government) Agencies and then sublet these contracts to small firms, that is apart from assisting small businesses in obtaining government contracts.

The Small Business Act (1953) which created the SBA also has a small business subcontracting clause in all government contracts over $10,000, requiring Federal Agencies to publicize in the Commerce Business Daily (CBD) all procurements over the small purchase threshold and any others with subcontract potential.

In lieu of setting up that table outside KICC, this could be a more impactful solution to both funds, that is if their sole measure of performance is how many groups of entrepreneurs they finance.

No small business owner would pass up the chance to grow their business by receiving technical expertise or collateral to access higher value loans. Neither would they refuse to competitively take part in the profitable public procurement market sector.