Go back to drawing board when business collapses

 

 

By DR FRANK NJENGA

Q: My husband’s business has collapsed. For the last 12 months he has been up and down trying to revive it. He walked to his bank manager last week and the lender refused to bail him out because he has an outstanding loan. Part of the problem is that my sister-in-law borrowed Sh 560,000 from my husband and is not willing to pay soon. 

I asked my sister-in-law and she told me off (that I am not the one she borrowed the money from). My concern is about the health of my husband who is having waking nightmares about his cereals business.

Right now, he cannot supply the orders he has and has become an emotion wreck. How do I help him to move on?

Your one question raises many other issues that must be put to consideration in attempting to help you sort out the challenges that now face you and your husband.

The first and perhaps most immediate challenge is how you as a family meet your obligations of day-to day-nature — food, rent, school fees and related basic needs.

The next challenge is how both of you go on to manage the problems created in the relationship between him, you and your sister-in-law.

Believe me; this part of the problem could escalate to involve your parents-in-law, your husband’s siblings and most tragically, your relationship with your spouse, a fact that would make things worse than they already are.

The next problem before you is that of credit rating. As you must know by now, banks will not lend to those with poor credit histories and his being listed by a credit reference organisation for not paying his debts will make it much worse for him. Try to make sure that does not happen.

The final challenge, is with respect to what went wrong in the business in the first place, on the assumption that you can deal with family type issues of your husband, children and his relatives, let us first consider what might have gone wrong with his business in the first place. By so doing, we might be able to better understand how we can help him.

The statistics available show that at least 50 per cent of all small and medium size companies started are closed in the first two years. Many more close in the first five years. In a sense, your husband can take a measure of “comfort” in the knowledge that he is with the majority.

That said however, he still needs to understand why his particular business collapsed in the way it did. To better understand this question, you and your husband may need to go the basics to understand what went wrong.

Did he, for example, understand the cereals business, and the local and international factors that impact the business?

Flooding of markets

Did it, for instance, collapse because of a prolonged drought in the country or was it because a group of well-connected business people imported cereals without paying duty that year?

Flooding of markets with cheap imports is a common cause of distortion of the market dynamics. These external factors, though they do not bring back the money lost, would give him (and hopefully the bank) some comfort in his future attempts to go back to business.

If on the other hand, a critical examination of what went wrong reveals that the business plan (if any) was poorly conceived and had no bearing on the real business world as it turned out, then questions must be asked about his acumen as business person in the first place.

Many reasons are given for the failure of small and medium size business all over the world.

A lack of experience in the business ethic is an important one. Many people retire from the civil service and put all their savings into say a cereals business in Kitale because many of their (less educated) relatives have done well in the venture. They forget that their relatives have many years of experience in the business, and not just money.

The other common error is inadequate capitalisation. Many assume that as soon as “profits” come after the first six months then the business will run itself!

Cashflow projections on paper, based on advice from friends and relatives can be way off the mark and often lead many optimistic new business people to undercapitalise their business.

A poor capitalised business is doomed to fail, even if all other assumptions are correct. Far too many people fail because of greater optimism on break even than warranted by experience.

The calculation on fixed costs (salaries, rent etc.) are often forgotten in the calculation (if done at all).

Did your husband, for example, factor in his own salary, transport and insurance expenses when he left employment to go into cereals? What about his personal assistant, messenger and the rent?

Others invest very heavily in fixed assets (unrelated to production) very early in the business. A person like your husband might have spent a large portion of his money in buying godowns for cereals he did not need!
 

Many people take away money from the business for reasons of “kindness” to the family. Money generated by the company belongs to the company!

By giving his sister money that did not belong to him, he planned to fail in business. At the end of the day, make sure that you both understand where things might have gone wrong.