Wednesday, August 13, 2014

YOU WANT TO BUILD A FORTUNE? START NOW



At the end of the week we were rolling in the aisles after reading the alleged leaked prayer requests of the recently deposed managing director of Uganda Broadcasting Corporation (UBC), Paul Kihika.

Among his requests were that his new board be disbanded and the minister of information Rose Namayanja – his erstwhile boss, be reshuffled from her position. Is there such a thing as taking your faith too far? Or maybe misplacing your faith?

But what really caught my eye was his prayer “to build business that will bring over sh100m profit per month.”

I am going to imagine that Kihika understands the difference between sales or turnover and profit, basically what is left over when all costs are deducted from turnover.

Let us do the math.

The profit he envisages will amount to sh1.2b a year, a nice hefty sum. So what size of company would one need to generate such returns?

Banks are notorious for having low return on assets and Stanbic Bank is not typical but they may serve as a useful indicator. At the end of last year Stanbic’s total assets stood at sh3,242b and made an after tax profit of sh102b. A very rudimentary calculation would show return on assets of about three percent. Using this figure Mr Kihika would need to build a business with at least sh40b in assets.

The New Vision Printing and Publishing Company has an asset base of sh66b as of the end of 2013. It has taken 28 years to build,  has a staff complement of over 1000 workers and a distribution network that spans the nation, the globe actually, because the company has a website.

But assuming Mr Kihika has the cash on hand, how much would he need to generate his sh1.2b in annual profit.

At last week’s Bank of Uganda Treasury bill auction the weighted average yield or the return on the 364-day Treasury bill was 12.379 percent.  At this rate Kihika would need about about sh9.7b in cash, considerably less than the sh40b to realise his target,.

This is Uganda.

Going by the stories surrounding corrupt contracts and procurements it is more likely that someone will hit a “deal” of sh9.7b than stick it out over 28 years building a sh40b asset. It is not even risky – for every corrupt official convicted we would hazard 100 get away scot free.

The prayer request is probably not unusual and such lofty dreams should be encouraged. But we need to take it a step further, work backwards and calculate what – in addition to fervent prayers, it would take to fulfil our dreams.

We will assume Kihika is a man of upstanding moral rectitude.

After writing down his prayer request he should have gone to a financial planner to get a sense of what it would take to get him from where he was – in terms of financial standing, when he wrote the prayer to where he wanted to be.

Everybody should do that.

His advisor might ask him what his target date for achieving the dream, which would have to be viewed against his current age – he might want to enjoy his cash way before 28 years. On that basis he may score the business landscape for an enterprise that promises the rates of return to make his dream come to fruition. The sooner he wants the dream to happen the higher the rate of return he would demand.

A rule of thumb is that the higher the anticipated rate of return the riskier the venture will be.

Given his ambition it is unlikely he can achieve it without a functioning organisation, it’s unlikely there is a legal briefcase business model that can make this happen.

To cut a long story short there are no short cuts. When we see the wealthy among us, we see the finished product, we need to dig deeper to see what it took to get them to where they are.

You can be sure that along with spadefuls of faith, one needs copious amounts of elbow grease, because there will be no gain without sweat.

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