19 December 2012

Zambia: Handling Rentals in SMEs


IN this column today, we take a look at one of the most troublesome expenses in a business set-up -- rentals.

I have used the world troublesome because rentals in a business expense structure are prominent features, especially if the entity does not possess premises of its own.

Rentals if not handled carefully and if not projected with precision become tricky and can be a basis for pushing a business from its rails.

Because rent is one of the prominent expenses on a business expense structure as I have stated, it is the reason most of the businesses who still have this expense give it the importance that it deserves.

A friend of mine once told me that he had no business premises to operate from because he was booted out of his offices for non-payment of rentals.

I had earlier thought that the premises were not alright for the type of business he was carrying out.

When I looked at the volume of sales in relation to the rentals he was paying out, I knew that sooner or later he was going to encounter such a problem especially if the volume of the business was not going to be increased in a short term.

As a business guide, before an entrepreneur looks at premises to rent, he/she should first examine the volume of sales and work out the percentage of rentals in relation to that.

If the percentage is less than 15 per cent, it could be considered as safe but if the percentage is 50 per cent and above, it is not good.

Why go for such rentals!

The other caution is that if the cash flow of your business is problematic, think carefully of renting affordable premises because some clients where you are expecting to collect some cash from may dissapoint you.

As for the friend I earlier alluded to, he went out to rent expensive premises.

Expensive in the sense that the sales volume were not as much as expected to cater for rentals in the ratio we have talked about.

This is just one of the commonest problems most SMEs are facing.

If somebody wants to start renting business premises she/he must ensure there is a good business projection in terms of sales volumes to escape the problems associated with non-payment of rentals.

It is not good for a business outlook to show good indications only to be disturbed because of the unfavourable rentals which could have been avoided in the first place.

Have you not seen when you go round Lusaka town centre people busy moving goods out of their shops or renovating their empty shops?

The problem is that rentals are so high that some of the business owners are failing to pay because their businesses cannot support that.

It is, therefore, important that entrepreneurs try by all means to ensure that the cost that relates to rentals is reduced, thereby decreasing the total operational costs.

Another important fact that ought to be understood on renting of business premises by business owners is that this cost must be ranked among the top priorities in terms of doing business.

Most of the business owners who are careless on this cost have seen themselves thrown out, hence losing out on viable businesses.

A business that is choked by rentals should examine itself, otherwise if the cost of office accommodation becomes an issue to the business, just know that the business would be derailed.

The expenses for rentals are mostly deemed as operational costs and they are equally important, just like workers' salaries.

They are most related to volume sales but they should always be kept below 15 per cent.

That way they would not be substantial enough to worry the business owner in terms of payment.

They should always be affordable to avoid defaulting.

This is because any default may result in eviction which is disastrous to the business.

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