Start-Up Businesses

I am sitting around thinking about my next move. That is, where am I taking The Learning Village? I have already registered the company and it is incorporated. I am yet to open a bank account, and register for both the income tax and the value added tax. After that what? I would likely have to wait and do a lot of marketing for the company. I may be sounding pessimistic, but it doesn't appear as if the future is that bleak, though.

I am very hopeful that the next year would bring a lot of business opportunities. The economy is growing; and looking around it doesn't appear as though the world economic crisis has hit Botswana that much. A lot of construction activities are taking place, and the new CBD is taking shape.

In finance, we know that the more you take on risk, the more rewards are likely to come your way. There is that positive correlation that all finance people would tell you about. By the way, these were my reflections for the day, as I sat around and read an article on Economics and Knowledge by F.A.von Hayek

What's Your Carbon Foot-Print?

This is a thought provoking heading; but as world leaders converge in Copenhagen to consider how to deal with global warming it is, probably, worthwhile to take a pause; and consider whether we are being environmentally friendly.

The talk is more about carbon, because it has been found that the rise in the amount of carbon gases released into the atmosphere increases world temperatures. Consider that with the fact that we cut a lot of trees! That's a recipe for disaster. Trees, by the way, use carbon dioxide for photosynthesis. So, next time you cut trees, have this in mind.

On a related note, one of the ways Botswana can contribute to this green campaign is to improve our public transport system. That way, most of us would use public transport rather than our cars. Have you noticed that most of the times, you will find only one occupant in a car, whilst we experience terrible traffic jams in the morning.

What about having a mono-rail system? I mean Botswana's first underground railyway system. This will take passengers in an almost circular flow(around Gaborone) and drop them off at strategic points of the city. They can then connect to other modes of transport, to reach their workplaces.

Boom Times

I can't help but wonder as I shopped with my younger daughter at The Game City Mall. It  was clear that business is strong and a lot of people can't get enough of what is available. No wonder the Game City Mall is expanding. Actually, the same type of activity can be witnessed at the River Walk Mall and Molapo Crossing.

Could this be proving the pundits wrong. I remember a few year ago, +/- 5 years, some of the pundits were expressing concern that so many investors seemed to be putting a lot of their investments in building shopping complexes. Their concerns were whether there would be sufficient business generated to cover the costs of such investments.

This sort of remind me of the not uncommon errors we keep on making. That is, we tend to think small, when the rest of the world has a bigger picture. Investments by the way are not costs, but represent future value creation. If we always think in terms of costs, we are likely to make dysfunctional decisions and focus on short term gains.

KBL Suspend Production of Coca Cola

I can not recall any time before where a private company has suspended production because food containers have expired. This is something to be hailed. I mean, upon realising that some of the bottles have passed their expiry dates, the company decided to suspend production until suitable ones were acquired. I remember in the past some private companies used to temper with labels on food items to change expiry dates.

However, I must commend public corporations for setting an example. Take the Botswana Meat Commission, for example. They deal in meat products for export; and every time there is any possibility of foot and mouth outbreak they shut their production facilities, until there are certain the disease has been eradicated.

Good job, Kgalagadi Breweries!

Bail Outs

It seems that everyone is catching a fever on these bailouts. As, I recall the US government came up with a stimulus package to shore up American companies, mostly banks. The reason was to make credit easily available, so that companies could have access to financing and, therefore, produce.

You see, if government injects money into an economy, production goes up and jobs are created. The increase in employment tends to lead to an increase in aggregate demand, which in turn leads to further increases in production, consumption and more jobs. As more and more people are employed, there is more money available to households, which can, potentially, be used for more consumption. This is called the multiplier effect; and it gets repeated over and over. In the US, there are signs that it is beginning to work.

I am yet to be educated on whether we had a credit crunch here in Botswana. I know a lot of our financial institutions are multinational, and their parent companies would have been afffected. But, seriously, have our local banks stopped lending? The fact is that most of our locally produced goods e.g. beef, garmets, diamonds, copper, nickel are consummed outside. Would our government's bail out encourage consumption of our products in the US, Europe etc. Note that most of these countries do not accept government subdidised imports. The problem is that as economic conditions deteriorated in the West, families began to save and became more concerned with value for money. The market, therefore, shrunk. So, at this juncture its hard to keep supplyng the same quantities at the same price. Cut down on costs. Cutting down on costs, doesn't mean you should retrench. Labour costs are mostly direct, except for senior management(which represent overheads). If you cut down on production employees, then you forfeit the opportunity to earn revenue.

So, what is the solution. No currency devaluation; rather companies should look at target costing. It's mostly about studying the market, and determining what share of that market you want to capture given the market price or the price you are comfortable with. Determine your desired profit margin, and lo you have the target cost. Invest in reengineering your processes to get the target cost of production if it differs, significantly, from the actual cost.

I have noted that in most occassions, companies in Botswana invest a lot in Financial Accounting; but not much in Cost Accounting or Management Accounting.

Christmas in Botswana & Business Opportunities

It's that time of the year when most young city dwellers are frantically organising to go to their masimo and meraka. For most, they would have been busy working in the city (the whole year) with little opportunity to visit their parents and relatives back in the rural areas. So, come christmas the city of Gaborone becomes almost deserted. You can literally stand in the middle of what used to be a traffic jammed highway for 5 minutes without seeing any vehicle coming your way.

So, business can sometimes be bad in Gaborone, this time of the year. On the contrary, this time usually brings a lot of joy for farmers in the rural areas. It is time for celebration, and goats and chickens get slaughtered, as most Batswana relish goat meat and Tswana chicken. For the aspiring young farmers, it is not a bad idea to venture into farming. Agriculture is basically one industry one cannot regret by going into; the returns are enormous. In fact the Botswana Development Corporation, a parastatal organisation, has put up proposals for interested investors to come forward and establish joint ventures with it for the production of dairy products.

It seems the responses are going to be positive, from the look of things. I don't have the numbers, but not so long ago I had one Chartered Institute of Management Accountants (CIMA) student approaching me for ideas on how to put up a business proposal. That is, after realising I have some training in Animal Health and Production. Who says Batswana are not entrepreneurial? This is a common fallacy; and I cannot understand why people perpetuate this negative stereotyping. This is a great country with good people. Stop pulling yourself down; I mean if Batswana were not entrepreneurial or hardworking, this country would not be where it is. Of course more can be done, but compared to the rest of the world we are doing well.

Preparing Management Accounts

There are 2 major traditional methods, which could be used to prepare accounts. These are absorption costing and marginal costing methods. The major difference in the 2 methods depends on how stock is valued ,under each of the methods.

With marginal costing, stock is valued at only variable costs of production. These costs of production include direct material, direct labour, direct expenses and variable production overheads. So, you must note that only variable production costs are used in stock or inventory valuation when marginal or variable costing is used.

Absorption costing on the other hand, in addition to the variable production costs, includes a fixed production overhead absorption rate. This fixed production absorption rate is measured by dividing budgeted fixed overheads by the budgeted or normal level of activity. Because budgeted values have been used in developing a fixed overhead absorption rate; also known as a predetermined rate, a possibility for over or under absorbing arises. It should be noted though that the under or over absorption arises only when absorption costing method is used.

There are other distinctions between the 2 methods, for instance marginal costing uses a contribution approach.(which is the difference between revenue and variable costs) In other words, when preparing accounts, under marginal costing, you will have to calculate cotal ontribution. And, then deal with fixed costs afterwards to determine the net profit for the period. Absorption costing method, on the contrary, makes use of gross profit. That is you need to find the difference between revenue and all production cost; and this is what is called gross profit. After this, you then less all non production costs to derive a net profit for the period.

The difference in approach may cause differences in the reported net profit. This happens when the amount of inventory is changing; that is, when stock is increasing or decreasing. You will know that inventory is changing when the opening and closing stocks are different or when production amounts differ from the sales volume.

The difference in profit is, therefore, attributed to 2 factors; the change in stock and the amount of the fixed overhead absorption rate. And, effectively when stock is increasing absorption costing will report a higher profit than marginal costing. When stock is decreasing it is marginal costing, which will report a higher profit. This happens because under marginal costing all fixed costs are treated as period expenses and written off in the period they are incurred. With absorption costing, however, fixed production costs are absorbed and will be transferred to future accounting period if there is a lot of closing inventory. This means less overheads are charged to the statement of comprehensive income when the amount of closing inventory is significant, hence profits will be maximised. When the stock level is reducing it means that more sales volume is registered than the amount of production, and as such a higher amount of overheads, brought forward in stock from previous accounting periods, would be released. When this happens, less profits would be reported under absorption costing.