One of the banes of micro and small businesses in Nigeria — and by extension Africa — is what we are about to discuss in this article. It is one of the things responsible for keeping businesses stagnant and unable to expand and tap into opportunities for growth. It is one of the reasons why most micro and small businesses do not survive beyond their owners.
As we had noted in one of our previous articles on small businesses, "small businesses are the drivers of any economy. In our opinion they are the mainstay of capitalism / societal economic development, creating wealth while closing the employment gap in the society". Therefore any society that wants to make significant progress and create jobs while reducing the unemployment gap must take the success of micro and small businesses seriously. Africa must create jobs for her burgeoning and teeming youthful population, and so must be interested in and deliberate (with all hands on deck) about ensuring that her micro and small businesses survive and succeed in order to create a prosperous continent.
Our nugget for this piece is on the need for small business owners to reinvest in their businesses, in other words, to build equity in their businesses.
When we talk about equity here, we mean in simple terms, the amount of the business' capital invested or owned by the business owner. Your equity is calculated by the difference between your business’ liabilities and assets recorded on the balance sheet of your business. It is a degree of your residual ownership in your business or asset after subtracting all debts associated with that asset.
As a small business owner, after working so hard for months or years to break even it can be tempting to want to begin to take out money from your business to meet up personal needs or to satisfy personal vanities. Afterall, you'd say, "how long would I continue to suffer to build without enjoying my hard earned money"? Or you'd begin to think to take out money from the business to invest in other places or channels. None of these are wrong, but it depends on the timing, stage of the business, opportunity cost, among other considerations. A good question to always ask yourself is, that money you are taking out today, if reinvested in the business what would the value be in the next 10 years? Does the business have the propensity to return significant value in the future for every dollar reinvested today? Is there room for growth? If your answers to these questions are in the positive, then every dollar taken out of your business is a huge disservice to your business, to you, to your society at large, and to the future generation.
Imagine for a moment if Mr Aliko Dangote, the richest black person in the world today, had toed that line of taking out money from his business while he was building it as a small business many years ago to satisfy his personal cravings, would his business empire have grown into the behemoth that it is today, changing many lives and families in the communities that they serve?
Some other entrepreneurs or business owners want to be overnight successes and believe that they can bully their ways through to billionaire status by leverage or Other People’s Money (OPM) as it is popularly labelled. So they ditch the time tested principles of organic growth through relying on their own resources and go for gold through leverage. We are not preaching against leverage or using Other People’s Money. You just need to determine when the time is right to go that direction. Leverage amplifies outcome- positively or negatively- if you succeed, you succeed big, and if you fail you also fail big! Which could mean, you get stuck in debt for a long time. Remember the story of the man swallowed by a whale? Can you imagine that feeling of drowning in debt that simply could have been avoided?
Real life scenario: There was a businessman who had a small business in Southwestern Nigeria and was doing well for himself. He had been in the Fast-Moving Consumer Goods (FMCG) distribution space for quite a while and had built his business over some years. At some point he felt he needed to grow his business further as some opportunities had come his way. So he took up distribution contracts for more FMCG companies and went to the banks to fund his venture. The banks welcomed him with open arms after considering his application and extended loan facilities to him. In addition, he had credit facilities with two of the companies he had been distributing for. Business was booming (so he thought), and the warehouses were super stocked regularly, so he felt comfortable drawing out money from the business beyond the salary he had placed himself on, to fund his lifestyle and other capital projects. He no longer reinvested his profits into the business monthly as was his tradition previously, which would have afforded him the ability to gradually reduce the loans he had taken from the banks as well as interest payments, while growing his equity in the business. As time went by the stock level began to drop and gradually the business began to dwindle. Among other factors that were affecting the business, was the leverage which the business had taken on — interest payments, principal repayments, renewal delays, and rising interest rates. The rate was actually digging a hole in his pocket faster than his margin could fill. But as expected, all of this was attributed to “village people” and “enemies” that he claimed were after him because of his success. Before long the business owner had to start disposing off personal assets to revive the business.
The point in all of this is focus on building equity in your business, especially if your intention is to build a sustainable business, and not to flip. Before you take on leverage, bootstrap. Do not rely solely on credit facility or loans from creditors. Build to last. If you must test any idea pilot it with your equity, and if successful you can then consider tactically scaling with leverage.
How do you build equity?
As your business thrives it can be tempting to begin to reap the fruit of your labour- make holiday trips, spoil yourself with that brand-new car you have been dreaming of, move into that your dream neighbourhood. None of these fantasies are bad. However, to build your equity in order for your business to continue to thrive you need to reinvest some of your profits back into the business, while minimizing expenses- retain some of your earnings in the business. As your equity increases, it provides a cushion, a buffer in case of tough times and can also help you finance growth opportunities. Reinvesting in your business could come as increasing your working capital, investing in new equipment that could help boost your operations, or expanding your facilities.
In addition, know the difference between your capital and your profit or returns, and keep your personal expenses contained to your salary and maybe your profit, but never your capital. Yes, pay yourself a salary (you can even be generous with it), just like every other staff so you would not have a justification to always dip your hands in the business to meet personal needs. Separate the business from yourself, even if you are the owner or founder.
Your capital is sacrosanct, and should only be built by reinvestment, not diminished by expenses. Growth is not what you withdraw from a business — it is what you leave inside it long enough to compound.
The businesses that survive, scale, and outlive their founders are rarely built on aggressive withdrawals or premature leverage. They are built quietly through reinvestment, discipline, and patience. Great businesses are not built by extracting value. They are built by compounding it.
Afterall, if you do not believe in your business enough to reinvest in it, who will?
Wishing you all the best in your business. Feel free to share this article within your network.
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