Bhizabhityo BB
Member
- Aug 18, 2022
- 7
- 16
Many entrepreneurs in East Africa struggle to sustain their businesses over the long term, high rent, debt, TRA and local government levies, among other pressures in Tanzania for example. But unfortunately, many have not realised that they are making strategic decisions using the wrong numbers as their compass. Every week, you hear from different business owners: “Business is going well, money is coming in.” Six months later, that business has closed. The bank account is empty. Debts are mounting. The owner is left asking: where did the money go?
Consider this: A clothing shop in Kariakoo sells TZS 5,000,000 worth of goods per month. The owner tells friends, “Business is going well.” Within 12 months, they cannot pay shop rent, staff wages, or TRA obligations, yet every day they are bringing in new stock. They are stuck.
It is true that Business does have many challenges. But the deeper problem is that this entrepreneur made their decisions using one word instead of three distinct concepts: revenue, profit, and cash flow, without understanding the difference.
Consider this: A clothing shop in Kariakoo sells TZS 5,000,000 worth of goods per month. The owner tells friends, “Business is going well.” Within 12 months, they cannot pay shop rent, staff wages, or TRA obligations, yet every day they are bringing in new stock. They are stuck.
It is true that Business does have many challenges. But the deeper problem is that this entrepreneur made their decisions using one word instead of three distinct concepts: revenue, profit, and cash flow, without understanding the difference.
Three Numbers That Are Not the Same, Even Though They Look Similar
Revenue is the total money coming in from sales. This figure says nothing about the health of your business. Someone can sell TZS 10,000,000 in a month and still go bankrupt.
Profit is revenue after all costs. But this is where most people stop without digging further. Profit can appear on paper, and you still cannot pay your bills.
Cash Flow is the final truth. It is the actual money available at a specific point in time. You can show TZS 2,000,000 profit on your books and still have zero in the bank, because your client pays in two weeks, but your supplier wants payment today.
Profit is revenue after all costs. But this is where most people stop without digging further. Profit can appear on paper, and you still cannot pay your bills.
Cash Flow is the final truth. It is the actual money available at a specific point in time. You can show TZS 2,000,000 profit on your books and still have zero in the bank, because your client pays in two weeks, but your supplier wants payment today.
Example:
Hardware Store, Mwanza
March, construction season after the rains:
Item Amount (TZS)
Monthly Sales (Revenue)8,500,000
Cost of Goods Sold (COGS)5,100,000
Rent + Electricity450,000
Staff Wages300,000
Apparent Profit2,650,000
Looks fine. But here is the hidden problem:
•Of the TZS 8,500,000 in sales, TZS 5,500,000 is on credit to contractors who will pay at project completion (45–60 days away)
•Cash actually received this month: TZS 3,000,000 only
•Supplier in Dar es Salaam needs to be paid this week: TZS 4,200,000
Actual cash position this week: TZS 3,000,000 (received) − TZS 4,200,000 (owed) = (TZS 1,200,000) — A DEFICIT
Profit: +TZS 2,650,000 ✓
Cash Flow: −TZS 1,200,000 ✗
This is what forces the shop owner to run to the bank for an overdraft, not because the business is failing, but because the timing of money coming in does not match the timing of money going out. Contractors pay slowly; the supplier charges immediately. That gap is a cash flow problem, not a profit problem.
You Are Making a Profit, But Is Your Capital Working Hard Enough?
This is where the analysis gets sharper.
Drinks shop owner in Dar es Salaam starts with a capital of TZS 35,000,000. In the first year, total sales exceeded TZS 50,000,000, and they earn a net profit of TZS 4,200,000. They are satisfied; they have made a “profit.”
But the real calculation is this:
ROCE (Return on Capital Employed) = Operating Profit ÷ Capital Employed
= TZS 4,200,000 ÷ TZS 35,000,000 = 12%
This means that for every shilling of capital deployed, you earned a return equivalent to 12% of that capital.
A healthy ROCE depends on the sector. For drinks retail, the industry average typically runs between 15–20%, depending on pricing and cost structure. A ROCE of 12% therefore, signals that the shop is underperforming, despite those sales volumes and first-year profit.
A healthy ROCE depends on the sector. For drinks retail, the industry average typically runs between 15–20%, depending on pricing and cost structure. A ROCE of 12% therefore, signals that the shop is underperforming, despite those sales volumes and first-year profit.
Why Tanzania Specifically?
Tanzania’s business environment has specific characteristics that make this problem more acute.
First: The TRA tax system is based on turnover (revenue), not profit. A business selling TZS 100,000,000 a year pays VAT, even if the actual profit is zero. Most entrepreneurs only discover this when TRA comes knocking.
Second: Markets like Kariakoo, Mwenge, and Ilala are saturated with competitors selling identical products. Price competition compresses profit margins to one or two per cent, even when revenue figures look large.
Third: Business culture in Tanzania measures success by sales volume. “I’m selling well” is the badge of honor in the market, not “my ROCE is 25%.” This creates an awkward incentive: chasing revenue growth without ensuring capital is working efficiently.
Fourth: Access to affordable credit is limited. Most businesses run on family capital or personal savings, which carry an opportunity cost that is routinely ignored.
The Problem With “Market Research” That Misses What Matters
Many entrepreneurs conduct market research diligently. They know their customers, competitor pricing, and market demand. But that research typically overlooks:
1. Competitors’ cost structures. They can price lower because their overhead is lower, not because they are operating at a loss.
2. Cash flow cycles. Different sectors have different payment timelines. Construction can wait three months for payment; restaurants collect immediately.
3. Compliance costs. TRA, OSHA, municipal licenses, business registration. These are real costs that can consume an entire small business’s profit margin. For example, wholesale traders in Temeke must pay a business license fee of TZS 300,000 per year to the local authority.
The result: someone enters the market fully prepared on pricing and customer needs, but with no regard for ROCE, cash flow timing, or compliance obligations. Six months later, they have stress, debt, and a letter from TRA.
Three Questions to Answer Before Opening Any Business
Before opening any business in Tanzania today, answer these questions with real numbers, not estimates:
1. How many months before my cash flow turns positive? This requires building a payment calendar based on expected timing, not just projected profit.
2. Does my ROCE beat the best alternative I know? If you cannot achieve a ROCE above 15–20% after all costs, including your own time, reconsider the model.
3. Have I calculated Tanzania’s compliance costs? VAT thresholds, licenses, and municipal levies are precisely where market research tends to stop short.
There are genuine opportunities in entrepreneurship. But opportunity alone does not make a business profitable; the right system of measurement does.
Most entrepreneurs do not fail for lack of drive or intelligence. They fail because they cannot read three basic numbers that every business depends on. That is a problem solved by financial literacy, not another loan or a new market.
