One of the main reasons behind many struggling businesses is the frequent diversion of scarce financial resources from otherwise thriving firms to fund other non-core activities.
By the time many Kenyan entrepreneurs discover that diverting money from their existing businesses to pursue non-related (but presumably lucrative) ventures is an exercise fraught with real danger, it is usually too late.
To be sure, opportunities to make some extra money away from your regular line of business will always present themselves. A savvy entrepreneur will indeed always be on the lookout to spot such opportunities and create additional wealth by taking advantage of the more promising ones.
But not all the possibilities are worth pursuing with the same vigour as your present business, unless, of course, your current business is in dire straits.
Many so-called “opportunities” are highly speculative. Speculative ventures can be risky affairs that could either bring in extra cash (when they work) or leave you without a single coin in the bank (when they fail).
While some level of uncertainty attends to almost every business activity, speculation must surely fall in another category altogether, if only because speculators cannot justify the reasoning behind their investments beyond wishful thinking. Speculators are adept at chasing the promise of high returns without giving due consideration to the risks involved.
But it’s a well-known fact that many speculative investments rarely bring about the promised returns.
When an entrepreneur begins to divert her cash from an otherwise thriving business to engage in speculative investments, you can almost be sure that financial trouble will eventually pounce on her like a bandit.
By way of example, consider the cybercafé owner who comes across a lucrative opportunity to make some extra cash arising from the expected spike in demand for specialised Valentine’s Day merchandise.
During the buildup to the day, she will likely join other speculators of all shapes and stripes to buy all sorts of red-themed merchandise (and especially red roses) in the hope of cashing in on the unknown and unverified “thousands of lovers” who would like to express their love.
To finance the purchase of merchandise, she will most likely have withdrawn a sizeable amount of money from her thriving cybercafé business and perhaps topped up the difference with a quick loan from her M-Shwari account. Given the spike in demand caused by fellow speculators, she’ll likely pay a small premium for her share of stock.
On Valentine’s Day, she happily leaves her cybercafé in the hands of trusted employees and sets up shop at a location teeming with potential customers. But on arrival, she’s greeted by an army of fellow speculators selling similar or better merchandise, often at lower prices.
Knowing the window to sell is shrinking by the hour, she drops her prices. Her competitors retaliate. By late afternoon, our entrepreneur is quite literally seeing red. Her expected sales haven’t materialised, and she shuts down her makeshift Valentine’s business, heading back to her cyber café with unsold, now obsolete stock.
As she closes up shop for the day, the full implication of her speculative foray hits hard. Her cash is tied up in unsellable goods, and she now faces a shortfall in paying her employees, landlord, and internet provider. She also has to figure out how to repay her M-Shwari loan or risk being blacklisted by credit reference bureaus.
Her once-successful cybercafé now teeters on the edge, cannibalised by a speculative gamble. Her only recourse is to rapidly boost her core revenues or sell the business altogether.
Instead of engaging in a speculative venture, she didn’t understand, she could have leveraged Valentine’s Day differently perhaps by offering couples discounts for internet access. She would have boosted sales and kept her capital intact.
In my hometown of Thika, this same scenario plays out during Mount Kenya University’s graduation ceremonies. Dozens of traders set up shop to sell snacks, flower garlands, plaques, and cards.
Most end the day with large unsold stocks and dashed hopes. It begs the question: why don’t they learn? Perhaps the speculative mindset blinds them from reflecting on flawed business models.
The writer is Director of Strategy, WYLDE International.
