If you own a new startup business in Nigeria or you are about going into a business, this question will come up naturally. When you invest money into a business you will definitely want to know how long it will take you to recover all the money you invested into the business. Will that be a matter of weeks, months or years?
Let’s say you invested 4 million naira into a mini
supermarket business and you would like to pull out your entire investment
from the profits the business will make, how long will it take you to recover
the entire 4 million naira from your profits?
The answer to this question will depend on several factors
which will all be explained briefly one at a time. Before then let us look at
another example. If you invested 1 million in a car wash business that
generates 100,000 naira profit per month, how long will it take you to recover
your investment? All things being equal, that should take 10 months. But is it
really that simple?
Let us take time to find out. What are the factors to look at
before projecting how quickly you can recover your investment? Given also that
the business environment in Nigeria is very tough and frustrating, bear in mind
that socio-economic factors not mentioned in this post are also important even
though they would not be examined.
What factors
that will determine how quickly you will recover your investment?
Let us take this factors one at a time they are;
- Scale at which the business will run
- The type of business
- The sector of the economy
- Expected profit margin on sales
- How much sales are you looking to achieve
- How does the competition interfere with your sales and
profit margin
What is the
scale?
Obviously the scale or size of your investment will determine
how quickly you can recover your invested funds. A small sized business has a
short payback period (expected period for recovering your investment) of a few
months compared to a larger business which could take years or decades. If for
instance I invest 1 million naira in a backyard
poultry farm and 100 million naira in a large scale poultry business, the
recovery period will not be the same even though we are looking at the same
business.
What type
of Business is it?
Businesses that have little to no manufacturing operations
and distribution tend to have higher profit margin and hence make more profit
per item sold than those that manufactured and distributed over larger areas. So
let us say invested 10 million to produce shoes in a factory and have to
distribute them over a larger area and if I invest 10 million naira into a shoe
shop that operates within a city, in the both cases I have invested the same
amount of money but in different types of businesses although they both sell
the same product (shoes). If both businesses record the same amount of sales in
12 months, the shoe shop will likely make more profit and hence the investors
will recoup their capital faster.
What is the
sector of the business?
Generally speaking, services sector and trading in Nigeria tend
to provide greater profit margin on products and services than manufacturing. The
main reason for this is because cost of production – power supply is poor and
hence heavy costs is required to power machines that produce in factories. Another
sector that struggles with low profit margin is Agriculture because factories
find it expensive to operate and most food produce are perishable or have low
shelf life. Therefore processing agric produce can be expensive meanwhile the
farmers themselves cannot distribute their produce on their own so they sell
what they grow at giveaway prices. But if you can distribute your own farm
produce inexpensively, you will make a lot of money and quickly recoup your
investment in farming.
What is the
expected profit margin on sales?
If you have a product which has more than 10% profit margin
and can sell hundreds of it daily, you will be able to double your investment
within a matter of weeks. If your product profit margin is 10% or more but you
struggle to make sales you won’t recover your investment quickly enough. Meanwhile
a business offering a product with low profit margin (like below 3%) will
always struggle to recoup its investment regardless of how much sales is
recorded.
How much
sales can you achieve in that business?
While sales volume does not guarantee return on investments,
it can help accelerate your recovery. To recover your investment the business must
be profitable and for a business to become profitable it must first make money
and money comes from selling products/services. So if the business must be
profitable there must be a minimum amount of sales it must achieve which brings
us to sales volume. If a business fails to achieve its ideal sales volume, it
will remain unprofitable or even if it becomes profitable it may take a very long
time to recoup the investment.
What is the
level of competition?
Then to the least noticeable factor which is the effect of
the competition on your sales or revenue. Think of the market (total number of
people who can potentially buy your product) as a big cake and the competition as
people who want to eat out of that cake. The more people you have coming
forward, the smaller the portion of that cake you will get. Also the bigger the
other people are compared to you, the more portion they will likely get of that
cake ahead of you. So if your competition is too strong they will take up a
large chunk of potential sales which will make it harder for you to make
profit. Likewise the weaker the competition the more profit you can potentially
make.
So in conclusion, the payback period or how long you have to
wait to recoup your investment depends on the above listed factors. For people
who are rushing to invest in a business they should pause and think about how
these factors will play out in deciding how much they would first make as
sales, then profit and then finally recouping their investments.
Paul Onwueme
is a professional business plan writer based in Abuja. You can connect with him
via email: paulonwueme@gmail.com or
call him on: 0803 206 4106 if you need a professionally written business plan
prepared for you
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