Wednesday, August 2, 2017

BE PROFITABLE BUT DON’T FORGET NET WORTH

I am deep into Brad Stone’s, “The Everything Store: Jeff Bezos and the age of Amazon” a fast paced narrative of how Amazon, which started as a bookseller and now sells almost everything, was built.
The company which survived the dotcom meltdown of earlier this century has grown over the last 23 years to the point that last week, for about half a day, founder Bezos was the richest man in the world last week.

But just before that I also read “Alibaba: The House that Jack Ma Built” which as kind of prescient because the richest man in China visited Nairobi and Kigali only days later.  Alibaba is a giant website which brings vendors and customers together to facilitate trade in almost anything. What makes the Alibaba story so interesting is that it was founded in China on five years after Amazon and it’s not inconceivable that in less than a decade it may be the biggest internet company in the world.

There are quite a few similarities in the growth of these two companies and just as any dissimilarities.

"But the common denominator between the two is the way they have been managed to gain market share, with profitability coming years later. The loss making was not caused by the wastefulness of the founders...

Related and also of interest is how both founders extended the personal frugality in their lives to the company, which allowed them to focus resources on building the company rather than themselves with the eventual outcome that they became exceedingly wealthy from their shareholding in their respective companies.

For Amazon more than for Alibaba, their very existence was threatened when the markets in the west went sour on the dotcom companies, for which Amazon, was a poster boy. Were it not for the company’s focus on customer satisfaction it might have gone the way of the thousands of dotcom companies that burnt through billions of dollars, flaming out before they showed a profit for their investors.

In Uganda we don’t need a dotcom boom and burst cycle to know about business failure. Only one in 10 companies make it to their fifth birthday. Beyond the issue of the questionable products or getting into crowded markets, the failure of the Uganda company can be seen in the financial statements.

The key difference between Amazon and Alibaba and our local floundering businessman is that while the former shift revenues increasingly towards building their assets bases – hardware and distribution networks, with the expectation that these will not only lead to the capturing of more and more market share and an eventual rise in revenues, our local businessman however tends to keep these much needed funds, needed for expansion, for himself. They pay themselves first, rather than the business they should be trying to build.

"So for instance our local shop keeper who while he makes a profit, given the margin on every good he sales, fritters off this profit by dipping his hands into the till every so often to finance his personal needs. Unfortunately these needs grow with his growing sales and rarely fall back if sales begin to falter...

Given a similar scenario Bezos or Ma, would restrict their raiding of the shop till, while pushing more funds into growing his stock, the size of his shop or the area that he dominates. In very real terms this means that he will put off to a later date the move to a more expensive neighbourhood or the VX he has been dreaming of or the visit to Old Trafford to see Manchester United play.

But we don’t have to look to the US or China for lessons how to improve the durability of our companies.

The Asian community were dispossessed of everything nearly half a century ago. They returned in the 1980s and 1990s, rebuilt their businesses and now account for almost seven in every ten shillings of revenue paid to the taxman today.

Interestingly many of our more successful businessmen have apprenticed at the feet of one Asian businessman or another.

It should be clear by now that a basic understanding of how financial statements work is imperative for any businessman.

How do I pay salaries? How do I replenish stock? What happens when I withdraw money? What happens when I bring money into the business (as many of our corporate types do)?  How do I pay taxes? How can I minimise my tax liability (without evading it all together)? Should I take a salary? How should my books look like to make them attractive to bankers, investors?

It is not rocket science. But it is the one thing that is dooming our businesses to short life spans.

"Even the businessmen with the best of intentions, who are not extravagant or even allocate assets properly, run into trouble because they are not thinking from a financial statements perspective. If they are doing badly, they can do well. And if they are doing well, they can do better....

And the beauty of it is that unlike a two decades or so ago there are a lot of young accountants around who can help make sense of any business’ numbers.

It bears repeating. While profit is good building a business’ book value is better. That is where company durability comes from.


1 comment:

  1. eToro is the ultimate forex broker for beginning and professional traders.

    ReplyDelete