TURNING THE BUSINESS AROUND

Recently I got interested in a business turn around situation. Up to that point the business was being run as a lifestyle business, the income from the business was being used to sustain the owner.

Long story short, the need had arisen to  grow revenues and expand the business. The business had several underdeveloped revenue streams, a huge asset base whose potential had not begun to be tapped, no surprises there as it was being run very casually. Which was understandable because how much can one man eat?

The first suggestion was obvious, an audit of the business was required to establish what the business owned, its income and expenses.

The next thing was to clarify the ownership, the rights and obligation of the owners – existing and potential.

 This last part was as crucial if not more crucial than the audit.

"Our businesses fail more for lack of organisation than for lack of money. To the extent that businesses are organised in their set up, how they participate in the market and how they relate to their various stakeholders determines whether they are well funded or not....

Negotiating the shareholder agreement proved harder than initially thought. What share would each shareholder get? The issue of how much equity each would contribute to the deal? And how would the business be financed going forward, when its needs extended beyond the initial owner’s needs? How would the business be managed going forward and finally, the elephant in the room, how would each be paid by the business for their interest?

They say that in setting up a business the initial fifteen percent effort will determine the destiny of the business.   That the way you start the business may lock you into a path way into the future for better or for worse.

By insisting on the shareholder agreement at the beginning would clarify a lot of things down the road – how decisions are made, how owners can fund the business and get paid by the business. These three components alone are what determine the long term viability of the business.

For instance if the business need a capital injection of a million shillings how is it decided that the money is needed? If the all the shareholders can not afford their share but some of them can foot the full bill how do we handle that, especially how the rich ones get paid in the future? And when and how do the shareholders start to see a return from the business? 

The shareholder agreement and adherence to it is the beginning of formalisation of the business.

What happens with our average business? Mostly they are sole proprietorships, which are most likely to fail to grow beyond the founders needs. But if they are limited companies, with several people coming together to pursue opportunity the thinking at set up doesn’t not go far beyond what the business will be and what each owners rights and obligations to the business are.  Trouble starts when they become successful, the money starts flowing in and disagreements  begin about how much of the money each is entitled to. Never mind that the business may not have even broken even.

Taken a little bit further a time comes when the owners and the business can not keep up with the capital demands of the business, how do they fund it? By borrowing or inviting new shareholders or selling the business altogether.

The question often comes up, why should we want to expand at all, we are happy at our current size. For starters growth is a survival mechanism. If your business does not grow it is only a matter of time before a bigger business with larger economies of scale comes and runs you out of the market...

We have seen it in our own time. Trading centres are giving way to malls; Fruit juice companies have given way to bigger beverage companies; cottage industries are giving way to bigger manufacturing concerns.

Back to my friends who were hoping to turn around their business. We are hoping to move from informality to formality not only in the way the business works but in the way the owners think about their business. 

By getting organised not only can they maximise the existing revenues streams, but they can tap into the business latent potential through borrowing, inviting new shareholders or selling it off all together, most likely using a combination of the all of the above.

"The business may very well fail in the future, but the owners are determined that it will not be because they were disorganised and confused....

DO NOT DESPISE SMALL BEGINNINGS

A major challenge of the Ugandan economy is our low saving rates. While it has grown over the years to about 19 percent of GDP in 2019 according to the World Bank it lags behind neighbours Tanzania at 35 percent, Zambia at 40 percent.

While it is about level with the sub-Saharan average these are still dismal figures that need to be pushed up.

"Low savings rate affects the cost of borrowing, high savings rates lead to lower lending rates and vice versa...

The argument though is that we save, its just not in the financial sector. Our savings are in livestock, crops and real estate.

Saving in these “real’ assets is a hangover from a time when inflation would eat up the value of  ones savings faster than one could accumulate them or when banks were not credible, folding at the slightest crisis.

The challenge with continuing to save the way we do is that there cannot be any significant ripple effect. My chicken will lay eggs for me, my cow will produce milk for me and on the occasion that I slaughter it feed a few dozen people in the village.

Saving in a formal financial institution, which will then take your money and lend it to those in need of capital has more far reaching effects, aiding the expansion of businesses, speeding up growth and development.

I was therefore tickled silly when a few weeks ago I “happened” upon Mushanga SACCO in Sheema district, western Uganda.

It was not its new double storey headquarters that caught my eye, but that almost every adult in its surrounding area had an account with the SACCO. 

Suppliers and workers accept payment through their accounts at the SACCO, which accounts they can access via their mobile phone.

While the lending rates are rather steep – three percent a month, the SACCO membership have worked out that since this is levied on a reducing balance they can reduce the interest they pay out by accelerating their repayments. No financial literacy class would have taught this better than hard experience.

But even better for me is that the SACCO has incentivised its members to providing it with long term capital in the way of fixed deposit accounts and by selling shares.

The net effect of this is that the SACCO which turned 50 in 2019 has total assets of about sh23b with sh9b of this being member equity. Not bad for a SACCO whose members minimum obligation is to save sh10,000 monthly....

Essentially what Mushanga SACCO and hundreds of others like it are doing, is mopping up the small monies the high street banks can’t be bothered to go out and look for and funnelling them into the formal financial sector.

On a local level the SACCO is spurring the economy of the area by shifting monies from where it is not needed to those who need it. While the lending costs are still high one would like to think that as their cost of funds falls this will be addressed, for now they have an effective mechanism for financial intermediation  that will make the difference for the area more than if it were not there.

The lessons for me are many but off the top of my head two stand out particularly.

One, that it is not true that we can not build our own financial institutions to even compete with the high street banks sometime in the future. These SACCOs, most of which are in the rural areas, have shown that even our small monies when aggregated can be leveraged as a force for good and push our own development priorities.

Secondly, that if our big fish in the cities will not put their resources together to create the banks that serve our people, the small people in the villages and in the streets will not wait around but take matters in their own hands to get access to financial services.

The challenge for Mushanga SACCO and others like it is leadership. Bad leadership can scuttle this progress in less than a year with questionable lending practices and  reckless spending. These SACCOs just like their bigger brothers the banks, biggest asset is confidence. Bad management can irreparably damage this trust and collapse these institutions.

But barring bad management or averse government policy, these institutions can serve as a real force for rural and national  transformation. 

Looking to the distant future it’s not inconceivable that these SACCOs with a tradition of prudent management, sensitive to its stakeholders will form the seed of our own local banks

To take them to the next level while keeping them grounded in their rural roots, government needs to  handhold these institutions in the way of  innovative regulation, capacity building support and eventually fiscal incentives to ensure they grow to take their rightful place at the high table of the financial sector. 

THE OLYMPICS NOT JUST FUN AND GAMES

This week Peruth Chemutai gifted us with a happy moment in these bleak times.

The special police constable floated -- that is what it seemed like to mere mortals,  to gold in 3000 m steeplechase. She became the first Ugandan female medalist ever at the Olympics.

We have three ranked athletes in the men’s 5000m final later today as well as Winnie Nanyondo in the 1500m finals, so there may be more joy for Uganda yet.

With Chemutai’s win Uganda jumped into 46th position in the medal standings vaulting over more established sporting nations like Egypt, Israel and India.

"A look at the  medal tables serves as useful proxy for development or lack of thereof, in countries...

The top ten nations at this writing were China, US, Japan, Australia, Great Britain, Russia, Germany, New Zealand, Italy and France. While at the bottom of the log were Syria, Malaysia. Kuwait and Ghana. Of course other nations like neighbours Burundi, Rwanda, Tanzania and South Sudan don’t even win mention in the medal table.

Going by the table its clear that sporting success comes from the respective society’s economic surpluses. That the more successful countries have enough money left over after looking after their citizens’ basic needs to funnel into sports.

The top medal winning countries made a killing in sports such as gymnastics, swimming, rowing, weight lifting and equestrian sports among others. The common denominator in all these is the huge outlays required in building the facilities and supporting the athletes to train for these events.

Forbes magazine reported a few years ago that it costs no less than $20,000 (Sh75m) annually to train an archer or table tennis player for at least eight years to make it to the Olympics and not necessarily win gold. It cost about $100,000 annually for at least eight years to train a potential tennis professional.

Beyond the financial cost it takes at least 10,000 hours of systematic practice to attain world class standards in anything, in this case sport. Broken down that amounts to three hours a day, five days a week for ten years. Our sportsmen don’t match up to world standards because they have not done their 10,000 hours, but if you think about it how much would it cost to sustain that effort?

In most of these countries most of these costs are subsidised by their respective governments as well as corporate sponsorships. The national subsidies come from taxes.

On the above evidence our athletes are winning in spite of ourselves. Going by GDP, we are a poor country and hence how much our government spends on sports is miniscule and our corporates entities even less so. 

Kenya are beginning to fall behind, as diminishing returns set in on their natural model of raising athletes. For the first time since 1980 Kenya failed to win Olympic gold in the men’s steeplechase event.

Uganda, like Kenya are relying on our naturally endowed athletes from the east to rack in the medals, but this will only last so long. 

So what is Uganda to do to keep up the momentum? 

The more successful sporting nations have strong grass root structures, which were not primarily intended to build gold medalists, but to engage youth in beneficial activities and keep them away from crime.

This infrastructure has helped identify thousands of athletes who are then funneled into more specialised training.

So for starters we need to revive the schools'national competitions. Our schools are the most extensive network already in existence that we can leverage.

At the bare minimum this will identify talent, but strategies need to be formulated, financed and implemented to take these budding talents to the next level.

But most importantly our sports organisations have to get professional management. This mode of volunteer managers who are there because they were voted into office and not necessarily on merit, is an archaic model that will take us nowhere soon.

Otherwise congratulations again to our medalists at the Olympics – Chemutai, Joshua Cheptegei and Jacob Kilimo. We wish the latter two and Nanyondo good luck in their races later today.

OF THE OLYMPICS AND NATIONAL BRANDING

The Olympic Games started last week in Tokyo, a year behind schedule, to a muted opening ceremony to mark the times.

In empty stadiums, athletes in swimming, gymnastics, soccer, handball, tennis and hockey among others competed hard never the less.

During the Cold War the Olympics also  had a subtheme, the competition between capitalism and socialism. The Olympics was used a big propaganda exercise, winning the most medals was meant to show to the world which was the more successful system.

That rivalry between the west and eats is much toned down now and thankfully so, as we can now focus on the athletes performance without being distracted by weighty issues of geopolitics.

But the branding value of the Olympics for competing nations has not gone away. Starting with hosts Japan. This is the second time the Japanese capital hosts the sporting bonanza, the last time being in 1964, when the games were beamed live around the world for the first time. In better times the Olympics would be a show of organisational and technological advancement for the host nation. This time it may be a show of how Japan is able to host the Olympics in the midst of a pandemic.

The US is the biggest team as usual, flying in over 600 athletes. Russian athletes are not competing under their flag following a two year ban imposed on the country for drug doping infringements. However athletes not involved in the doping scandal are competing as The Russian Olympic Committee (ROC).

Countries and corporate entities put a lot of weight on the performance of their athletes, as they should.

"A brand, personal, corporate or national is built on four pillars – awareness, association, experience and loyalty. They basically follow in that order....

There is no brand if no one knows about it. So winning athletes raise the awareness of nations. One of the best stories of the games so far was of freestyle swimmer Ahmed Hafnaoui who upset the form book to win gold in the 400 meters freestyle, suddenly online searches for Tunisia went through the roof and Ahmed’s following on social media exploded. You will be shocked how many people out there can not point out Uganda on a map of the world, leave alone Africa.

Some may brush this aside as unimportant, but if you think about it why do you buy the groceries you do or shop from the shops you do or hire one mechanic and not the other? It starts with knowing them. As a country, company or person, being known is where the branding process begins.

Following on from being known is what the brand is associated with. Believe it or not Uganda continues to be associated with Idi Amin, it does not help that now Netflix has a docuseries with Amin squarely in the middle of it. The US, which has arguably the highest level of violent and organised crime and history of systemic racism is known more for other things – democracy and business. Their winners in the Olympics enhance the brighter side of the US. So having a dark past does not necessarily doom your brand.

Events like the Olympics create awareness and promote positive associations about countries. To experience or feel loyalty for those countries you would have to go there, the Olympics does little to help with that.

So for the US, which will be competing to top the medal table, the Olympics will cement the perception of world dominance. For China, ROC and the EU countries will look to place strongly too as a way to improve their perception as serious players on the world stage. Countries like South Africa, Tunisia, Kenya and even Uganda by winning will improve the perception that they are doing good things in their countries and deserve a second look.

The hardnosed bean counters will be rolling their eyes at the idea that national brands have even a passing effect on GDP, but they will be shocked.

It is not true that if you build it they will come.

"You can have the most green environment, the greatest number of animal species and still only manage a million tourists a year like Uganda, while the city  of Miami – a concrete jungle and the most violent city in the US attracts at last count, six million tourists a year....

As an example the most visited places are better branded – more people are aware of them and have positive associations attached to them.

For the individual athletes the Olympics is a test of their prowess and offers a hope of an improvement in their lives if they do well – that means they will be more widely known. For nations it will increase their profile and the positive associations surrounding them.

But that is half the work. The real work in brand building is that when you have made the brand known and created some positive associations it matters that you work hard at making sure the experience of the country matches or exceeds the associations  created...

I am a tourist, I have seen Stephen Kiprotich, Julius Cheptegei, Winnie Nanyondo and Halimah Nakaayi win on the world stage, so when I come to Uganda I am expecting the basics -- safety, comfort and convenience otherwise my experience will be soured and brand Uganda suffers. It is all connected.

So

"going to the Olympics should be more than cobbling together a bunch of athletes and sending them off with a hope and prayer, it should be seen in the context of a national branding strategy....

One interesting thing about the Olympics, or more specifically the US Olympic team – the US has no sports ministry.

ECONOMIC EMIGRANTS ARE A SAD INDICTMENT ON UGANDA

This week weight lifter Julius Ssekitoleko was released by police on bond. Last week he was deported from Japan where he had tried to stay on as an illegal immigrant. Sskeitoleko who has struggled to find employment because of the shut down of Kampala’s night life – he is a bouncer, listed this and the fact that his partner is pregnant, as reason for his ill fated move.

It is difficult not to sympathise and most people do.

Recently it was reported that hundreds of young people are being shipped out monthly to the middle east, to find work as menial workers. Again apart from the allure of earning in dollars, these often unskilled workers are struggling to make ends meet here.

It is safe to say that anybody whol leaves this country to work abroad, even the well paid ones, would rather be working at home, close to their friends and family.

Working abroad is not all its cracked out to be, they soon discover that with the high cost of living their incomes are not as juicy as they first seemed.

"While these émigré workers – illegal or otherwise, are sending more than a billion dollars back home annually, that is a fraction of their usefullness to this economy if they were gainfully employed here than abroad....

We are a wasteful country on many levels and that is the reason we can not keep our children at home. Each one of these young people beyond being Ugandans are units of economic output that we are donating to other countries.

Of course, the worst thing we can do is prevent them from living to better themselves, that is so 20th century.

We should start by committing to ensure every Ugandan can find gainful employment in Uganda. That’s where it starts, clearly we have not made that commitment yet.

At the basic level we need to create an environment for business to thrive, so that jobs can be created. There is a lot of work to be done in building infrastructure, producing skilled workers and to ensure property rights are secured. But even more important, if government wants to be really useful, it has to work at creating market access for our goods, locally and abroad...

Creating demand locally is a chicken and egg situation. To create local demand there has to be an increase in incomes across the board, but that only comes when people are gainfully employed. A crude, but unsustainable way to do it, is for government to give relief funds to the most vulnerable in the society. Another crude method that has been used with some success elsewhere is for government to take up local products especially from agriculture.

In the early 1980s Kenya launched a school milk program. Under the program all primary school children would receive 250 mls of milk at least twice a week. With this single stroke Kenyan milk production jumped and Kenya Cooperative Creameries (KCC) became a huge player, graduating to exporting UHT and powdered milk. The initiative was brilliant because aside for the nutritional benefits to the kids it created a huge market for processed dairy products that persists to this day.

Without doubt such or similar initiatives would need a massive outlay of resources from the treasury, but the long term benefit in terms of healthier kids, the building of the productive capacity for us to launch into the export market and the thousands of jobs that would be  created up and down the value chain, would far outweigh the cost.

But the real jump in job creation would  be for government to facilitate access to foreign markets. It was heartening to see new agriculture minister Frank Tumwebaze pushing for Kenya to open its market to our products. Interestingly this was happening as Kenya’s President Uhuru Kenyatta was in the UK suing for greater access to that market for his country’s horticultural produce.

To give a sense of how this can be transformative, a friend went down to South Africa to try and get his coffee on the shelfs of a major supermarket chain. After hearing him out they suggested he start by trying to supply their 14 branches in the Cape Town region. But he soon gave up when faced with the demands. The supermarket chain wanted them to supply 45 tons of their branded coffee every two weeks, but in addition have a constant 45 tons in their warehouses on standby. As if that was not enough payment would be due within 60 days of delivery. He worked out that to meet the demand, he would have to scale up his operations almost four fold – including workers, and that was only for the Cape Town market, forgetting his current clientele. 

Access to markets also means helping our own businessmen to scale up to meet the new demand in quantity and quality. But this can also go to include services especially ICT, financial, education and health services, where we can develop a real competitive advantage if we committed to it and did so systematically.

 There are probably hundreds of ways this can happen. We will not be reinventing the wheel.

But probably more importantly, committing to having everyone be gainfully employed at home will avert scenes like we saw in South Africa two weeks or so ago. There people took advantage of protests against the arrest of former President Jacob Zuma to loot businesses. Over the last two decades  or so South Africa has done a dismal of spreading the wealth around more equitably, instead the powerful and connected have forgotten their commitment to the majority blacks, engaged in corruption on an industrial scale increasing the hopelessness of the everyday man.

If South Africa with the security industrial complex it has can fail to keep the calm, what of us?