Beauty and the CAPEX!!

Posted: 10 months ago by Ubong Ita | Reading Time 3 min

DON'T TAKE THIS POST LIGHTLY!

Nigerians (I'm thinking it's some cultural background thing. Might not be too accurate though) have an inclination to holding material possessions. A good number of us like to express wealth in terms of Objects and representations.

Big houses, expensive cars, jewellery,  clothing, name it. We just like to have it BIG. This post isn't trying to condemn the lifestyle. This post is targeted at the impact of this social structure on business operations and the growth of a typical SME in Nigeria.

I have worked with a lot of start-ups and they had a really good outlook until the money came in. Once we started hitting some numbers their founder's look to changing their lifestyle. (See post of "I don HAMMER mentality" below).

This same thinking is what a lot of small business owners approach business with. They want to start off big! We talking heavy investments in capital Assets. I know some will argue that some projects need good funding to even get started but here's the wisdom for that. A popular Investor once said "if you wanna own a poultry start by selling eggs". I'll add mine - if you want to set up a tomato paste plant start by retailing tomatoes. (I once wrote a business plan for a tomato paste factory evaluated at 10bn. Funding was available but project never kicked off because the executor didn't know much about tomato business so that even with the aid of the Italian partners, much couldn't be done).

 

Back to the crux of the matter.

One of the biggest killers of SMEs is investing too much on fixed Assets without carrying out proper analysis on its impact on business. Impact like ROA and it's effect on Working Capital. Can the business make enough money to maintain these assets and still run the business? Can you comfortably cover the cost of financing this capital expenditure? These are questions you should sit down with a Financial consultant and discuss before committing huge funds to any project.

 

If you don't take anything from this post, get this!!!

1. NEVER FINANCE LONG-TERM INVESTMENTS with SHORT-TERM  funds.

2. Before you get a loan to fund capital Assets, expansions and other capex, ensure your business has enough working capital to pay the Principal and interest on the loan and still run your operations.

3. Never expand without carrying out a thorough review. Look at your Payback period, Breakeven period and Viability of that investment (expansion).

 

It is okay to take risk, but always look before you jump.

 

Thanks and have a great day.