Entrepreneurs Versus Traders

             (This blog post is excerpted from my training materials for the African Growth and Opportunity Act.)

Africa has had traders for millennia so international trade is not new to businesspeople on the continent.  However, traders are short-sighted; they sell what they have and then repeat the process with little to no long-term planning.  For example, I have seen African women who sell clothing come to conferences or trade fairs and sell what they have without contacting potential distributors and figuring out how they will work out an arrangement to regularize sales so they can determine how much to make over a specific time period and for how much they can and should sell their wares.

  The difference is that traders make what products they can and then find buyers.  Entrepreneurs study the market for unmet needs and develop strategies to meet those needs over the short term and plan to expand their customer base in the long term.  In olden times, being a trader was sufficient to survive, but in the modern world, it won’t succeed, especially if you want to grow a business.  Africa desperately needs more entrepreneurs.

            The key tool entrepreneurs use is the business plan.  Many people think a business plan is to show potential funding sources or partners who you are and what you offer, but business plans are perhaps of greatest help to the businessperson himself or herself.  In competition, one must know where you’re going and how you’ll get there.  This also is vital information so that governments understand the potential of businesses they license and so they can gauge potential tax revenue and job creation.

            I will now summarize the elements of the business plan:

Executive summary: This is at the beginning of the business plan and summarizes the entire plan for anyone interested in the business’ efforts.  It is what we called “the elevator pitch” or what you might explain to an interested party on a short elevator ride.

Mission statement: This is the vision for the company – where you want to take it going forward.  Are you going to remain small, add products and services, grow large or open multiple outlets?  It also allows you to describe your business ethic, that is, how you intend to serve your customers or clients. 

Company history: This highlights significant achievements on the road to creating the company.  It reminds you of where you came from. If you are a new business, you should emphasize why you decided to go into this business and why you think you can succeed.

Objectives: These are your short-term goals – what you plan to do immediately to establish your business or make it survive against competition for serving your customers or clients.

Strategy: This is your plan for achieving goals now and into the future.  It is not short-term.  It is your long-term plan for your business.  You must know where you intend to go.  Failure to plan for your business puts planning in the hands of your competitors, and they want you to fail.

Business and industry profile: This is an overview of industry as you see it.  Who are your current and potential competitors and how successful are they?  Are you in a business that serves many people or one that has an exclusive or limited market?  Keep in mind that if you are successful, others will want to copy you.

Competition analysis: Your dreams of success must be grounded.  That is why you do what is call SWOT analysis. You must be brutally honest in examining your Strengths and Weaknesses, as well as your Opportunities and Threats.

Description of product or service: This is where you set out both features and benefits of what you’re selling.  Features are the elements of what you offer, and benefits are how what you offer addresses the needs of your customers or clients.

Target market: Here you identify who you are selling to.  In a complex series of markets such as the United States, customers often can be found in clusters.  You must locate where those clusters exist and decide how you will reach them with your products or services.  You should serve the target market around you while trying to see how you can expand your market in other areas or countries.  Using the internet, you can reach people globally quickly and accurately based on their interests.

Pricing strategy:  Building on your description of your products or services, you must decide whether you are promoting the quality of your offering or the value as opposed to what others offer.  Quality offerings come with higher prices, while value offerings have lower profit margins because you are typically making money based on how much you can sell.  You need to produce less of quality products or services because the law of supply and demand says that the more you have for sale, the less valuable it is.  On the other hand, because the prices are lower for value goods, you need to produce enough to make your profit target, but you must be careful that the expenses don’t limit your profits too much.

Marketing strategy: Now that you have identified your target market, this is your plan for how to reach them.  Trade shows allow you to interact with other companies or investors. Word of mouth has traditionally been a major means of reaching a larger audience. In the age of the internet, you definitely can reach individuals and groups that way. 

Owners resumes or background:  In this part, you must summarize your experience relevant to the business you are in or want to enter, as well as your partners and key employees.  People will want to know who you are and why they should do business with you.  It is inevitable that these questions will be asked this at some point so choose the way you answer them.

Plan of operation: This deals with the specifics of how you have set up your business and how you will operate it.  If you manufacture, what are all the specific processes involved?  If you are providing a service, how will you provide them?  Be as detailed as possible in your answers because this is how you determine what your costs will be, and it will let you know if there is any flaw in your operating plan.

Financial forecasts:  If you are an employee of a government agency or company, you are told how much you will produce and how often you will be paid. When you are a business owner, you still need to know how much you will produce or provide over various periods of time.  You must meet your payroll for your employees and pay yourself.  You must account for your expenses, including fixed costs such as rent and power and variable costs such as labor and materials.  Once you have an overall strategy, you should be able to estimate how much you expect to make over a period of at least three to five years.

            Businesses in America, Africa and elsewhere too often make the mistake of believing that what’s in the cash register at the end of the day is their profit.  It is not.  So many people run their business into the ground by believing this misconception.

            Here is the formula for determining profit:

Revenue – Expenses = Profit

            That is, profit is what is left once you subtract all your expenses.  Those expenses include usually fixed costs and variable costs. Fixed costs are ones that typically do not change or change only slightly. Examples of fixed costs for a business are monthly utility expenses and rent.  Variable costs are costs directly tied to the production of a product, like labor hired to make that product or materials used. Variable costs often fluctuate and are typically a company’s largest expense.

            Now the next two concepts are connected.  I’m sure we’ve all been to vendors who want to sell us a statue or necklace or hat.  Have you ever wondered how they determine how much to charge you?  That involves their understanding of the unit cost of each item, i.e., how much does it cost to make that piece?  That isn’t necessarily a simple computation, but it is a very necessary one.

            The unit cost is a total expenditure incurred by a company to produce, store, and sell one unit of a product or service. Unit costs are the same as the cost of goods sold or the cost of sales. The unit cost is determined by combining the variable costs and fixed costs and dividing by the total number of units produced. For example, assume total fixed costs are US$40,000 and variable costs are US$20,000. So, US$60,000 ÷ 30,000 units, for example, would mean that each unit costs about US$2.  So, if a vendor sells that item for less than $2, he or she is losing money with each such sale. 

            The break-even point is the point where a company’s revenues equal its costs. The calculation for the break-even point can be done in one of two ways; one is to determine the number of units that need to be sold, or the second is the number of sales, in whatever the currency, that need to happen.  So, you calculate whether you need to sell more, or you need to charge more to not lose money.

The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’ revenue is below the break-even point, then the company is operating at a loss. If it’s above, then it’s operating at a profit.

So, let’s say your company is making bottles of soft drinks.  The fixed costs are US$2,000 a month, the variable costs are 40 cents per bottle produced and the sales price is US$1.50 per bottle. Then the formula is US$2,000 ÷ US$1.10 (which is $1.50 sales price – the 40 cents variable cost per bottle).  The answer is 1,818 bottles must be sold a month to break even – the minimum amount to meet expenses without losing money.

            These calculations are vital to any company – large or micro – that wants to stay in business, not to mention be successful.  The more African businesspeople  – and all Diaspora businesspeople – use these principles, the better off all of us, whether in the Diaspora or not,  will be in the global economy.