Starting a small business: When size really doesn’t matter

How to tip the balance of failure and success in your favour.

KARACHI: After I decided that I wanted to start a new business, a bookshop, the best person I could think of for guidance was Rahim bhai.  He had years of experience in distributing and selling books and magazines all over the country.

“Why do you want to get into this business?” was his first question. “Do you have experience of selling books?” was the second.

After hearing my replies, he went on, “This is a competitive business, and you will need a lot of patience before you can get established. Not to mention the investment. If you open a run-of-the-mill shop, your chances of success will not be very bright. Therefore, for a proper bookshop you will first have to consider two things; fixed costs and recurring costs. Fixed costs will include setting up the shop, shelving, air-conditioning etc. The other major initial cost will be your stock. Say, the setting up would be a hundred thousand and stocks of about three hundred thousand, that’s four hundred thousand.”

“Among the recurring costs, rent would be the most important one. Remember, in retail business there are three critical factors; location, salary of shop assistants and utility bills. A properly located shop would cost you around fifteen thousand a month. Salaries for a reasonably experienced shop assistant plus a helper should be about ten thousand a month. Electricity would cost you around six thousand a month. Take another five thousand in telephone bills and miscellaneous expenses. That comes to total monthly expenses of thirty-six thousand or say, forty thousand. Now divide that by the number of days you intend to open your shop during a month, say thirty days that would come to about thirteen hundred rupees per day.”

“Now your profit margin on books would be around twenty per cent, which means you will need to make a sale of six to seven thousand every day just to break even. Do you think you can generate that much?”

“I appreciate the reality check of my dream of opening a bookshop. I think I will have to give it a more serious thought before I proceed further. I hope you won’t mind if I called you again in a few days,” I said to him. My initial excitement about the new venture was sobering down.

“Not at all.  Remember, your first twelve months’ recurring expenses come to thirty-six thousand multiplied by twelve, that is four hundred and thirty-two thousand. If I were you, I would have first year’s entire financial needs handy before I started. Bye.”

Rahim bhai gave me the street wisdom acquired over decades in less than half an hour’s conversation, for which I am most grateful. In case it looks too fast paced for would be entrepreneurs, let me describe what he said.

Determine your suitability (personal aptitude, family obligations, time) for the business you want to get into.

Carefully list the costs first, both the onetime costs as well as the recurring ones, separately. Be conservative rather than overoptimistic while estimating sales. The opposite applies for estimating expenses. One expert says, carefully plan and estimate business needs, specially the financial needs, then multiply the figure by two. And do it in writing.

Any business you start will require a minimum gestation period, which cannot be squeezed much. Therefore, plan for your own basic living expenses until your business reaches a stage where it can sustain you. Do not expect miracles.

In a survey carried out in the West, they found out that 60% of businesses close down in their first year because of cash flow problems. That is, the business is probably doing well enough, but the money coming in is slower than the money that has to go out as payment for salaries, bills, raw materials and the stocks.

All said and done the single advice that precipitates for the new entrant in business is: be very careful. Plan realistically and as thoroughly as you can. But also remember the example of the bid to take over KESC by a rich Saudi business group. They must have spent millions of dollars in research and planning the acquisition, and won. They had even appointed a German to head their KESC. Then they suddenly vanished. Whatever the reason for their withdrawal at such a point, it had to be something which they overlooked.

Therefore, entrepreneurship, although can be taught, has an element of elusive characteristics about it. It is probably something bordering on romanticism or art. Nothing can guarantee your success one hundred percent, but serious homework will certainly improve your odds. That is why the dictionary defines an entrepreneur as a person, who undertakes a commercial activity with the chances of success and failure.

So, just do it!  But with eyes open.

The contributor writes on socioeconomics and has a background in trading and exports in the private sector

Published in The Express Tribune, April 2^nd, 2012.