When you evaluate a potential business, are you just looking at the profit margin?

You could be leaving a far more lucrative business if that’s the main consideration.

You also need to consider the customer re-order rate/ inventory turnover (number of times you replenish the inventory in a year).

A business with a far lower profit margin can be far more profitable than one with a higher profit margin simply due to the inventory turnover.

For example:

A business with a start-up capital of merely KSh 10,000 and a 35% net profit margin, that consistently replenishes its stock every month, will end up having a net worth of KSh 309,086,076 after only 2 years, if all profit is reinvested (not considering scalability).

On the other hand, a business with a start-up capital of KSh 1,000,000 and a net profit margin of 90% (about three times the net profit margin of the “small biashara”), but only replenishes its stock every year, will end up having a net worth of KSh 100,000,000 after 2 years, if all profit is reinvested (not considering scalability).

That means the “small biashara” ends up being worth KSh 209,086,076 more than the million-shilling company, after two years (not considering scalability).

Here is a table showing the growth of the “small biashara”:

And here’s a table showing the growth of the million-shilling company:

Now, for real-world examples, here is a table showing the average profit margins by industry for 94 industries and the top 10 companies in the world by market capitalization in 2019:

You’ll notice that none of the top 10 companies in the world feature in the 11 highest profit margin industries.

And a company like Berkshire Hathaway Inc., the 5^th top company in the world is within an industry with an average profit margin of 8.70%, which is FIVE times lower than the highest profit margin industry.

You may also note that companies like Alibaba, Amazon, and Apple feature among the top companies, having been started as “small biasharas” in the US and China.

Author: Victor Nyorani

Many Kenyan entrepreneurs have a hard time getting capital to start or grow their businesses.

Even those who get capital face the risk of all that money going down the drain if the business fails, like hundreds of others that have closed shop in the past few months.

Therefore, the best way of going about it is to find a “safe” source of capital – not taking out a loan, which you’ll have to repay whether the business succeeds or not.

Here are several options to consider.

1.    Offer cheap pre-payment plans

Pre-payment plans are an incredibly valuable strategy not only to get capital for your business but also paying customers.

Talk about killing two birds with one stone.

It’s such an effective technique that even established companies use it.

A simple example is concert tickets. Concert organizers typically offer lower prices for tickets purchased in advance, and higher prices for tickets purchased on the event day.

The lower-priced advance tickets can pull in huge crowds before the event starts. And the money generated can be enough to cater for all the costs of setting up the concert.

A New York business owner called Louis Rossmann applied a similar strategy when getting a retail store for his Mac repair services. By offering dirt-cheap pre-payment for his repair services, he got a whole bunch of customers who gave him enough money to pay for the rent for his new retail store.

With a bit of creativity, you can apply it to just about any other business.

2.    Use a barter trade deal for an office

Perhaps, the capital you need will be used to pay rent for your business premises. If so, why not try to get the business premises without the money.

You can do this by offering some service to a business owner in exchange for using his/ her premises for your business. With such an arrangement, you’ll need to identify a business that’s compatible with yours.

Maybe you’re planning to start a movie selling shop, and you know of someone who needs an attendant for his/ her clothing retail shop. You can offer your services as an attendant in the shop in exchange for running your movie selling business in the shop.

As long as the deal is a win-win, it should work well for both parties involved.

After all, even in this case, established companies run similar partnership deals. That’s what’s happening when you buy a laptop manufactured by Hewlett Packard with the Windows operating system from Microsoft.

3.    Get a supplier credit

Ever wondered how some of your friends managed to start big hardware shops, yet they didn’t seem to have so much money?

Well, they probably didn’t have that much money, but they had something even better…

They probably got a supplier credit.

Here, the supplier can stock your shop, and you repay the supplier as you sell your products. You’ll probably need to make an initial deposit.

With this strategy, you can start your business with a bang!

4.    Drop-Shipping

If you’re planning on doing online retail, you’re in an even better position.

You can start a MEGA online retail store with ZERO inventory. No loans. No supplier credit. All you’ll need is your online website and some funds for marketing the site.

And it gets even better.

When buyers order anything from your site, you’ll never handle the product yourself. You’ll just get the money in your account.

This is possible with drop-shipping.

With drop-shipping, you’re partnering with the supplier, whereby the supplier handles the order fulfilment. Through an online platform like Shopify, any order made through your site is directed to the supplier.

If there was ever an easy way to run a retail store, this is it.

It’s so easy that you can start and make tons of cash within days, as you can see in this video.

What’s more, such a business is not just limited to one country. You can reach clients in different regions.

With a bit of creativity, you can develop many other strategies to start your business without a loan. All you need to do is identify and take advantage of the existing opportunities around you.