Sounds completely counter-intuitive but that’s exactly what Seitebatso Rakgokong, owner of Masedi Electric-Serve did and it’s paid off massively.
It’s a tactic used by many new and growing businesses: Take on anything you can. After all, business is business right? Wrong. Take a look at this scenario.
In 2010, Masedi Electric-Serve, a Rustenburg-based electrical installation and maintenance business, turned over R3 million, in 2011 R4 million and in 2012 a whopping jump to R14 million. But then in 2013 revenue dropped to R9 million. Surely that’s a catastrophe?
At face value yes, but dig below the surface and examine the financials and it turns out Masedi Electric-Serve is three times more profitable at R9 million than it was at R14 million. How did this happen?
Lesson 1 from the trenches – Limiting pitches
In 2004 the majority of Masedi Electric-Serve’s clients were government departments. The trouble with government departments are that they’re notoriously slow in their payments which presented a cash flow problem for the business. So Rakgokong decided to balance his client base by getting private sector clients. The strategy worked and business started growing.
Rakgokong then anticipated the business crunch that the 2008 recession would bring and started pitching to anyone and everyone.
“We aggressively submitted tenders. Because we typically regarded a 30% to 40% conversion rate as doing well, we used that conversion ratio to gauge our bids. What we hadn’t anticipated was that we succeeded in a higher than average conversion rate thanks to government’s continued spending, and by 2012 we had 34 projects running simultaneously.”
By the second quarter of the year, the excitement of so much business had worn off and reality started sinking in: “Some of our jobs were over 300km away, there was a big crunch with cash flow and as a result our profits suffered.”
Lesson 2 from the trenches – Gaining control of profits
That Rakgokong learnt the hard way is that hyper growth without systems can kill a business. Fortunately he had joined the 2012 class of Property Point, a Growthpoint enterprise development initiative.
“I’d realised that in the busyness of so many projects, we were losing track of profitability as we didn’t have specific financial monitoring to track individual project profitability, just gross and operating profit. Before hyper growth we enjoyed a healthy profit margin, but we were shocked to see it go down to just 4% and some projects were even incurring a loss. Property Point taught me to analyse my financials properly and figure out what solutions I needed to regain control of the business.”
“We simply had to move away from simple spreadsheets and take on more sophisticated financial management software that could provide detail on project specific costing. I also send my financial lady for training so she could better monitor the financials.
"Next, we began revising quotes as the time that lapses between a project bid and commencement can be long and costs go up. The third big change we implemented was to streamline procurement. Even though we were getting supplies from the same company, having different individuals on their end resulted in inconsistent pricing.”
The result of all this hard work saw Masedi Electric-Serve move from endangered to thriving, and they’ve learnt the important lesson of refining their list of who they bid to, based on their capabilities and expertise, and keeping project costs in check for maximum profitability.