Help! My business makes good profits but I’m dependent on loans

My name is Edwin. I own a business in Nairobi.

Below is the profit income from the month of March to July 2022:

• March Sh8,300
• April Sh89,000
• May Sh97,000
• June Sh154,000
• July Sh174,000

Three months ago, I took a loan with a bank Sh400,000. I have paid three months and I am still compliant. It's a one-year loan. I pay a monthly instalment of Sh36,000.

Two months ago, I also took a loan Sh200,000 with KopoKopo. I have paid 9 percent of the three-month loan. I pay daily depending on the sales.

All the money from the above loans have gone to restocking my shop.

I have another long term loan with my Sacco. I have remained with a balance of Sh50,000.

Last year, I borrowed my brother Sh150,000. I have paid him Sh100,000. I have remained with a balance of Sh50,000.

I have not been saving any money.

My bills are: House rent Sh16,000, House girl Sh6,000, Utilities Sh5,000, Phone Sh2,500, Food Sh25,000, Commuting Sh5,000, Charity Sh6,000, Entertainment and grooming Sh5, 000, Fees Sh10,000, Rent shop Sh12,000, Employee Sh10,000, Marketing Sh10, 000.

Please help.

Rhina Namsia, is the founder and chief executive officer of The Acemt Consulting, a training and consultation company that provides financial planning and investment advisory

Your monthly expenses on average are equal to your monthly profits and with no savings you are a month away from not meeting your needs and wants in case anything happens to your business.

You need to establish structures and mechanisms to analyse your business model and determine if the profit margins are good or bad as follows:

Have an efficient plan for repaying our loans: This will ease your cash flow. You have a Sh6,000 monthly expense for charity. Are you obligated to fund charities monthly or can you spare this money to help offset some of your debt burden? The following are three ways you can use to pay down your debts: -

a). Start paying the loan with the highest interest. In this case, it is the Sh200,000 loan which is due this August, followed with the Sh400,000 one that has a balance of Sh36,000. Then pay the Sacco and lastly your brother.

b). You can opt to pay the small loans first. This includes the loan from your brother, the Sacco loan, and the Sh400,000 loan respectively. Then, concentrate on finishing up the big loan, but since it is also due, you may have to speak to your lenders and have it restructured.

c). Consolidate the loans. You can opt to have Sacco buy off all the loans and prolong the payment period with a lower interest rate. That way, you will only have one main loan without duplications.

Evaluate the profit margins and cash flow of your business. You could be seemingly making hundreds in profit, but they are quite low in terms of gross and net margins.

If the margins are low, then that tells you some of the expenses are high and you will need to find out which ones and find a solution. Profit margins may as well be good, but your business cash flow could be poor. A good business cash flow is better than a high profit-making business.

Determine your Cash Conversion Cycle (CCC). You seem to have a problem with paying loans that are used to stock up your shop.

The cash conversion cycle is a metric that expresses the time it takes for a business to convert investments in inventory and other resources into cash flows from sales.

Aim to have a lower CCC. A higher one means your business is much slower to convert inventory into cash. You should be able to meet your loan obligations from the sales.

Evaluate the rate of return on the loans you take. It’s not always that empty shelves are a sign to restock the inventory.

It requires more insights into the demand of the consumers, the time it takes to receive the products, inventory management, and different stages of the supply chain.

Separate your business and personal accounts.

Pay yourself and let it be an expense on your business books. Let the business expenses be paid from the profits you make including the loan repayments, and determine your net profit afterward.

Have proper financial business records, if possible, out-source this service.

If you have any money problems, send us an email via [email protected] and leave your number for contact. Money questions will be answered on this page.