Start saving even when you are still paying bank loan

A few years ago I sat down with my banker to discuss a facility. She made one observation that I considered, and I still consider more important than the money I got. She told me that my business seemed to be growing well but by assets did not seem to grow at all.

True, then I did not consider it wise to save or invest in assets when my business needed more cash. And in any case I was always in debts.

Quite remarkably, many people hold onto this misconception. To many it does not make sense to take money from a business that has not matured or even stabilised to put in savings or invest in assets with low interest income or appreciation.

The thinking is almost always the same - why invest outside your business where returns are low yet you are paying interests on loans and still you need more to expand and increase revenue?

Yet it extremely important that every month as you pay yourself, your employees, taxman and others, to set aside something, however small and commit it to savings and investment. This ensures that as your business expands and revenue increases, your savings and long-term assets also grow.

After my banker explained to me the perils of having a business without assets and savings, it reminded me of a man I know very well who died poor several years ago when his well-performing business failed.

Unfortunately, despite the appreciable size of his business by local standards, he did not even own a house or plot. He had spent all his years and energy growing his business. So when the industry he operated in collapsed and his business experienced challenges, he had no options or capacity to migrate.

One of the mistakes most entrepreneurs make is to imagine that it makes sense to increase business revenue and get out of debts before they start saving or investing outside their business.

As a matter of fact setting aside a portion of your income every month should be the norm whether you are in debt or not.

You can save in interest-earning bank account or invest in unit trusts, shares, bonds or other instruments with different liquidity. Remember we save for a rainy day not necessarily to earn interest. Interest is just a bonus. It is better to save in a low interest account than not to save at all. Your savings or assets can be used as collateral to access relatively cheaper facilities from lenders.

Saving money outside your business reduces risks associated with your industry. It requires a lot of discipline to save money in a bank account when you are struggling most of time with cash flow and liquidity issues. However, by buying an asset such as land on credit and paying every month forces you to save. It forces you to look for money to pay the monthly installments alongside other bills.

Mr Kiungais a business trainer and the author of The Art of Entrepreneurship: Strategies to Succeed in a Competitive Market. [email protected].