Scaling to meet demand with limited resources
Capital is finite, cashflow is fuel, customers are investors, margins builds the foundation for the future.
Building a SME manufacturing / farming business requires a lot of resources, so it was very important early on for us to know the extent of which our seed capital could take us. Our burn rate unlike most industries is not only tied to labour, but to production, like the cost of fuel,maintaining our farms,raw materials, packaging, logistics, foreign exchange risk, maintenance,rent etc.
Our budget gets quashed all the time by the unpredictability of the cost of doing business in Nigeria. Its very normal for us to have a budget of 1.2m for X amount of raw materials, and see it snowballed by as much as 50–100% more in just a few months.
In Nigeria, if we pay a local supplier for the future delivery of a raw produce, at a locked in price today and the price increases in a future date, the supplier would request that we top up the differences or get a refund. A future contract in black and white, might save you from this exposure, but the informal nature of trade in general across the country, presents a significant challenge for SMEs, where middlemen would not be willing to get into a formal written contract for future price of supplies.
This is the story for many SME businesses that live and breathe within the walls of Nigeria, and more often than not, don’t live long enough to tell their story.What then do we do? What can we do, to still grow and scale a small business in this country?
Do we budget a significant high multiple of our cost of raw materials today, to hedge against possible or likely increase tomorrow? How does that make a case for a feasible business opportunity today with the high unpredictable prices of tomorrow?
How do we deal with finite capital, lack of external finance, high cost of capital and unpredictable increase in raw and packaging materials?
The answer to this questions is not simple, as we had to, and would continuously improvise as the challenges present themselves. In our businesses today, we currently handle some of our cost exposure through markups(high margins) and customer financing.
We target customers, that understand the value of our products, and are willing to pay the right price for high quality finished products. It's much easier for us to build a successful small business that prides itself in high quality product than to build one that just solves the supply/demand problem, with the same quality and service our customers can find elsewhere. Our margins internally today, ranges from 35% -175%, and this gives us the leverage to grow through retained earnings. This we do with our wholesale business, and a portion of our distribution business.
Customer Financing, helps us increase our capacity to produce more, and allows us to scale beyond our capacity and limited finances at any particular time. Some of our customers are comfortable with prepaying for finished products to be delivered at a future agreed date. This they do because they are happy with the quality of our product. We honor prices of tomorrow, with pre-purchases of today, due to the cheap financing the customer provides us today.
We also avoid getting raw materials and supplies on credit terms, because it comes at a cost due to the limited flexibility we have in negotiating prices. This might not be the case if the prices of the raw materials are fixed and there is only one source for it.
In Nigeria, as an SME we leverage on quality, margins and relationships to grow and scale our business. Capital is not cheap, and being cognisant of the cost of capital to our business in the long run, helps us tremendously. We want to grow, so we focus on the basics, and strive to be the best at doing the basics remarkably well.