How to Manage Working Capital

(Eric Halsey) #1

“Of all the struggles we’ve had, none have impacted us as much as lack of inventory.”
-Philip Walton, Co-Founder of BRCK

We’ve created lessons about Getting Paid Upfront and Managing Working Capital in Early Production already. Both of those tie into cashflow, but here we’re going to go deeper on that subject. Because properly managing working capital and cashflow is often the difference between success and failure. Nzambi Matee, learned that lesson.

##Local Suppliers and Cashflow

“We tend to assume it’s not locally available so we go out there to get it when it’s next door. But if you buy local you can rush to the shop and get it, so I only import if I can’t get it local. That’s saved us so much time, if you order $2000 and it takes 2 months to get here you’ve lost that time.”
-Karl Heinz Tondo, Founder of Africa Born 3D

For Karl, switching to local manufacturing was all about maintaining cashflow. If he had to wait for foreign shipments of supplies to arrive, he would find himself paying for items and then waiting months to receive them. During that time, the money is spent and he can’t earn more because he hasn’t received the goods yet.

It took time, but ultimately he realized that considering time as a cost transformed the way he thought about his business. Nzambi Matee also found that early on it was difficult to fully understand how valuable her time was.

“When you’re at a young level you don’t see the monetary value of time, only when you scale up.”
-Nzambi Matee, Founder of Boda Kifuniko

It became clear that looking at cashflow without thinking about time was a recipe for disaster for both Karl and Nzambi. They had to focus on cutting the time between spending money and earning it back so they could reinvest profits into growth. By doing that they each saw huge cost savings.

“At the time we were not keen on inventory, we were doing it haphazardly. We later realized if we noted the timeframe on inventory and compare them it would be better. We were not using not that much money we cut 12K to 8.5K by having an inventory and saving on time”
-Nzambi Matee, Founder of Boda Kifuniko
##Debt VS Bootstrapping
"We’ve never taken substantial debt. We borrowed money for car loans and stuff, but, no. We have really only reinvested our profits over the year to build from a reseller service company to a full-fledged ISP operation with satellite, radio, and fiber optic services, all built with our own $10,000 initial investment capital."
-Alexander Sulzberger, CEO of Ecoband Networks

Back in the 90s, Alex couldn’t borrow money in Ghana to build his business. So he had to develop a way to build his company with its own profits (AKA bootstrapping). He focused on growth, managing his working capital to allow him to reinvest profits in future growth as quickly as possible. Today, Ecoband is a national brand name in Ghana and expanding around West Africa. And still under its original ownership.

“It is very difficult to borrow money in Ghana. Of course, there is always the option of taking venture capital, which was not available at the time in West Africa when I started the business in the 90s.”
-Alexander Sulzberger, CEO of Ecoband Networks

While growing without investors began as a necessity, Alex found it allowed him to grow while not giving up equity to investors. But it was only possible as long as he managed his cashflow.