How to start a small scale business

How a Low-Profit, KSh 10,000 ‘Biashara’ can be Worth More Than a High-Profit Million-Shilling Company

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”:

Number of Days After Start of Business Capital at Beginning of Stock Period Profit Profit Re-Invested in Business Capital at End of Stock Period
30 10,000 5384.615385 5384.615385 15,385
60 15,385 8284.023669 8284.023669 23,669
90 23,669 12744.6518 12744.6518 36,413
120 36,413 19607.15661 19607.15661 56,020
150 56,020 30164.85633 30164.85633 86,185
180 86,185 46407.47127 46407.47127 132,593
210 132,593 71396.10965 71396.10965 203,989
240 203,989 109840.1687 109840.1687 313,829
270 313,829 168984.8749 168984.8749 482,814
300 482,814 259976.7306 259976.7306 742,791
330 742,791 399964.201 399964.201 1,142,755
360 1,142,755 615329.5399 615329.5399 1,758,084
390 1,758,084 946660.8307 946660.8307 2,704,745
420 2,704,745 1456401.278 1456401.278 4,161,147
450 4,161,147 2240617.351 2240617.351 6,401,764
480 6,401,764 3447103.617 3447103.617 9,848,867
510 9,848,867 5303236.333 5303236.333 15,152,104
540 15,152,104 8158825.128 8158825.128 23,310,929
570 23,310,929 12552038.66 12552038.66 35,862,968
600 35,862,968 19310828.7 19310828.7 55,173,796
630 55,173,796 29708967.24 29708967.24 84,882,764
660 84,882,764 45706103.44 45706103.44 130,588,867
690 130,588,867 70317082.22 70317082.22 200,905,949
720 200,905,949 108180126.5 108180126.5 309,086,076

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

Number of Days After Start of Business Capital at Beginning of Stock Period Profit Profit Re-Invested in Business Capital at End of Stock Period
365 1,000,000 9000000 9000000 10,000,000
730 10,000,000 90000000 90000000 100,000,000

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:

Industry Average Profit Margin Median Inventory Turnover (Times Inventory Replenished in a Year) Top 10 Companies and Rank in World by Market Capitalization
1 Transportation (Railroads) 50.93 percent 14
2 Real Estate (General/Diversified) 41.23 percent 71
3 Tobacco 31.42 percent 1,559
4 Banks (Regional) 28.99 percent  
5 Cable TV 25.44 percent  
6 Investments & Asset Management 24.52 percent 25
7 R.E.I.T. 24.44 percent  
8 Beverages (Alcoholic) 24.35 percent  
9 Semiconductor 21.47 percent  
10 Bank (Money Center) 21.46 percent  
11 Financial Svcs. (Non-bank & Insurance) 20.06 percent 29/ 67
12 Software (Entertainment) 18.91 percent   Alphabet Inc. #4, Facebook, Inc. #6, Tencent Holdings Limited #8
13 Telecom. Services 18.76 percent  
14 Real Estate (Development) 18.42 percent  
15 Information Services 18.41 percent  
16 Hotel/Gaming 17.62 percent 6
17 Semiconductor Equip 15.61 percent  
18 Utility (Water) 15.06 percent  
19 Telecom (Wireless) 14.88 percent  
20 Brokerage & Investment Banking 14.23 percent  
21 Reinsurance 13.53 percent  
22 Entertainment 13.43 percent   Alibaba Pictures Group Limited #7
23 Computers/Peripherals 12.74 percent   Apple Inc. #2
24 Restaurant/Dining 12.11 percent  
25 Food Processing 11.98 percent 53
26 Utility (General) 11.49 percent  
27 Retail (Online) 11.34 percent   Amazon.com, Inc. #3
28 Insurance (Life) 11.24 percent  
29 Drugs (Pharmaceutical) 10.94 percent   Johnson & Johnson #9
30 Software (System & Application) 10.45 percent   Microsoft Corporation #1
31 Green & Renewable Energy 10.02 percent  
32 Oil/Gas (Production and Exploration) 9.94 percent 19
33 Broadcasting 9.59 percent  
34 Power 9.57 percent  
35 Healthcare Information and Technology 9.55 percent   Alibaba Health Information Technology Limited #7
36 Insurance (Prop/Cas.) 9.51 percent  
37 Chemical (Basic) 9.30 percent 95
38 Oil/Gas (Integrated) 9.23 percent   Exxon Mobil #10
39 Environmental & Waste Services 9.19 percent  
40 Beverage (Soft) 8.76 percent  
41 Diversified 8.70 percent   Berkshire Hathaway Inc. #5
42 Shipbuilding & Marine 8.69 percent  
43 Metals & Mining 8.33 percent 58/ 57/ 79
44 Electrical Equipment 8.31 percent 78
45 Chemical (Specialty) 8.29 percent  
46 Aerospace/Defense 7.92 percent  
47 Air Transport 7.86 percent 65
48 Trucking 7.82 percent  
49 Machinery 7.74 percent 76
50 Coal & Related Energy 7.50 percent 19
51 Construction Supplies 7.47 percent  
52 Steel 7.32 percent  
53 Packaging & Container 7.30 percent  
54 Retail (Building Supply) 7.29 percent 96
55 Homebuilding 7.19 percent  
56 Education 6.81 percent 10
57 Household Products 6.79 percent  
58 Transportation 6.74 percent 4
59 Business & Consumer Services 6.47 percent 18
60 Oil/Gas Distribution 5.98 percent  
61 Real Estate (Operations & Services) 5.87 percent  
62 Healthcare Products 5.80 percent  
63 Retail (Distributors) 5.63 percent  
64 Shoe 5.59 percent  
65 Building Materials 5.23 percent  
66 Chemical (Diversified) 4.97 percent  
67 Auto Parts 4.92 percent  
68 Apparel 4.52 percent 115/ 98
69 Computer Services 4.03 percent  
70 Retail (Special Lines) 4.00 percent  
71 Retail (Automotive) 3.90 percent  
72 Office Equipment & Services 3.84 percent  
73 Farming/Agriculture 3.44 percent 60/ 455
74 Oilfield Svcs/Equip. 3.25 percent  
75 Recreation 3.25 percent 34
76 Advertising 3.10 percent  
77 Paper/Forest Products 3.07 percent 59
78 Retail (Grocery and Food) 2.85 percent  
79 Rubber & Tires 2.72 percent  
80 Healthcare Support Services 2.46 percent  
81 Electronics (General) 2.30 percent 78
82 Furn/Home Furnishings 2.20 percent 111
83 Engineering/Construction 2.18 percent  
84 Telecom. Equipment 2.11 percent  
85 Food Wholesalers 2.05 percent  
86 Retail (General) 1.90 percent  
87 Software (Internet) 1.88 percent  
88 Auto & Truck 1.82 percent  
89 Hospitals/Healthcare Facilities 0.78 percent  
90 Publishing & Newspapers -1.00 percent 33
91 Drugs (Biotechnology) -1.61 percent  
92 Insurance (General) -1.61 percent  
93 Electronics (Consumer & Office) -4.07 percent  
94 Precious Metals -5.90 percent  

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 5th 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.