1.1 Why Businesses Close and How Costing Keeps You Open (Start Here)
Costing means working out what it really costs you to make, buy or deliver what you sell, so that you can set a price that covers every cost, pays you and leaves something to grow the business. It is the most practical money skill a business owner can learn, and it does not need an accountant or a degree. This first lesson shows why so many businesses close in their first year, what costing has to do with it, and how the course will help you.
Busy every day, short of cash
On the last Saturday of the month, the seven members of Mirisai Mukando, a savings club in Highfield, Harare, meet at a member’s home. Each member runs their own business. Each brings one money problem to the meeting.
This month Chiedza Mupambwa, a maheu maker who sells 500 ml bottles of the maize drink to tuck-shops, speaks first. “I work every day and the shops take everything I make, but I could not afford a full restock this week.” Mai Rumbi (Rumbidzai Gavaza), a vegetable vendor in Mbare and the club treasurer, asks her to write down what came in and what went out last month.
Worked example W1: Chiedza’s busy month
| A | B | |
|---|---|---|
| 1 | Line | USD |
| 2 | Cash in the business at the start of the month | 1,500 |
| 3 | Bottles sold | 11,000 |
| 4 | Price to shops | 0.45 |
| 5 | Sales | 4,950 |
| 6 | Still owed by shops at the end of the month | 450 |
| 7 | Cash collected | 4,500 |
| 8 | Cost per bottle: ingredients, packaging and batch labour | 0.27 |
| 9 | Paid for ingredients, packaging and batch labour | 2,970 |
| 10 | Paid for running costs (rent, helper, transport and others) | 1,650 |
| 11 | Taken home in small amounts | 650 |
| 12 | Cash in the business at the end of the month | 730 |
| 13 | Change in the business’s cash | -770 |
How it is worked:
B5: =B3*B4B7: =B5-B6B9: =B3*B8B12: =B2+B7-B9-B10-B11B13: =B12-B2
What it shows: Chiedza sold 11,000 bottles, yet the business has USD 770 less cash than a month ago (B13). Some of the gap is money still owed by shops (B6). The rest is quieter: her price may not cover all her costs, and the USD 650 she took home in small amounts (B11) was never planned. At this rate her starting cash is gone in two months.
Try it: Copy this into Excel starting at cell A1, then type the formulas in the list. Change B11 to 300 and see what happens to the cash in B12. Then put B11 back and change B6 to 0.
Chiedza’s drink is good. But she copied the price other makers charged, took cash home when the family needed it and never worked out what one bottle costs her.
Why people start a business
People start businesses for good reasons. In the Global Entrepreneurship Monitor (GEM) survey of 2019, in most of the 50 economies studied more than half of people starting a business said one motive was to earn a living because jobs are scarce. Owners also name other benefits:
- An income when jobs are scarce
- Independence and control of your own time
- Using a skill you already have, such as baking, sewing or decorating
- Building an asset the family owns
- Employing other people and serving a real need in your community
- Learning and growing as a person
How many businesses close early
Many of these businesses do not last. Kenya’s national survey of micro, small and medium businesses in 2016, run by the Kenya National Bureau of Statistics (KNBS), found that 46.3% of the businesses that had closed did so in their first year, and that businesses started in the previous two years made up 61.3% of all closures. Even in a rich economy the first year is the hardest: figures from the US Bureau of Labor Statistics show that about one new business in five closes within its first year, and only about a third are still open after ten years.
What owners say, and what is really happening
When owners are asked why they closed, the answers sound alike. The same Kenyan survey found that the main reason was a shortage of money to run the business (29.6% of closures), driven by rising costs, falling income and losses. GEM surveys find that the most common reasons for leaving a business are that it was not profitable and that the owner could not get finance.
These answers are true, but they are the symptom, not the cause. “Not profitable” usually means the price never covered the full cost. “Ran out of money” usually means the start-up money was eaten slowly, by small costs nobody wrote down, by cash taken home and by sales on credit that were not collected. Eunoia’s teaching model below shows how this happens to a business that looks busy.
| Stage | What happens | The hidden costing failure |
|---|---|---|
| Months 1 to 3: the good start | Start-up stock is bought at old prices; friends and family buy; sales feel strong | The price was copied from others, not worked out from a cost card |
| Months 3 to 6: the squeeze | Restocking costs more; credit customers pay late; small costs pile up; the owner takes cash home | The price no longer covers the cost of restocking; drawings and credit are not tracked |
| Months 6 to 12: the crunch | The owner cannot afford a full restock, so buys less and sells less; equipment breaks | The start-up money has been eaten; no money was set aside for equipment |
| The end | “Business was slow”, “no capital”, “too much competition” | The symptom is named, not the cause |
Challenges owners face
| Challenge | What it does to your costs |
|---|---|
| Rising prices for what you buy | Your old price may now be below your cost |
| Many similar businesses nearby | You copy their price, whatever your own costs are |
| Customers who buy on credit | You have paid for the stock but have not yet been paid |
| Spoilage, breakage and theft | Every unit you do sell must carry the cost of the ones you lost |
| Family needs and emergencies | Cash leaves the business without a record |
| Licences, levies and charges | Costs that arrive once a year are forgotten in the monthly price |
Three questions costing answers
Every lesson in this course helps you answer three questions about your own business:
- What does one unit cost? One bottle, one loaf, one chicken, one job.
- How many must I sell each month to cover my costs?
- Am I paying myself, and is my capital growing or shrinking?
By the end of Module 4 you will be able to answer all three for Chiedza, and for yourself.
Meet the club
You will follow seven members of Mirisai Mukando, each with a different kind of business.
| Member | Business | Where |
|---|---|---|
| Chiedza Mupambwa | Maheu maker, 500 ml bottles | Highfield |
| Sekai Chiwara | Baker: bread, buns and celebration cakes | Chitungwiza |
| Tawanda Marowa | Décor and events hire: tents, chairs, covers and centrepieces | Glen View |
| Tsitsi Mapuranga | Curtain maker, made to measure | Warren Park |
| Baba Kuda (Kudakwashe Ndlovu) | Broiler chickens, 500 birds a cycle | Domboshava |
| Tapiwa Chakanyuka | Phone stall | Harare city centre |
| Mai Rumbi (Rumbidzai Gavaza) | Vegetable vendor and club treasurer | Mbare |
How to use this course
- Each worked example is a small spreadsheet. The letters across the top and the numbers down the side show where each cell sits, as in Excel. Type the cells inside into Excel starting at cell A1, then type the formulas listed under the grid; your answers should match.
- Every figure in the case is fictional. Prices, taxes and charges differ by country and change, so use your own.
- Still testing a business idea? Business Solutions Toolkit: Turn Real Problems into Products People Buy (course 56) shows how to find a need worth serving.
- Each module ends with a toolkit: grids to fill in for your own business.
This course teaches standard costing and pricing methods in its own words. Figures from published surveys are dated and attributed where they appear. The course is not endorsed by, or affiliated with, any organisation named in it.
This course teaches costing; it does not promise that any business will succeed or earn a particular income. Results depend on your market, your prices and your decisions.
About the case: Mirisai Mukando, its members and their businesses are fictional. They were created by EunoiaData for teaching purposes only. Any resemblance to real clubs, businesses or people is coincidental. All figures are fictional and illustrative; prices in your market will differ.
Words to know
| Word | What it means |
|---|---|
| Cost | What you pay to make, buy or deliver what you sell |
| Price | What the customer pays you |
| Profit | What is left from sales after every cost, including your own pay |
| Capital | The money and things you own that keep the business running, such as cash, stock and equipment |
| Drawings | Money you take out of the business for yourself or your household |
| Cost card | A short sheet that shows what goes into one unit and what each part costs |
Example: A kiosk owner in Nairobi (fictional) opened with USD 900 of stock. Sales were good for three months. By month five her supplier’s prices had risen, but she kept her old prices because the shop next door had. Neighbours bought on credit, and airtime, transport and a market levy came from the till unrecorded. By month seven her shelves were half empty; she closed in month eight, saying business was slow. A cost card would have shown the problem in month five.
What this means for your business
| Your business | What to do |
|---|---|
| A trader (you buy and resell) | Check your price against today’s restocking cost |
| A maker (you make products to sell) | Cost one unit before you copy anyone’s price |
| Made to order (you quote each job) | Count your hours and overheads in every quote |
| A farmer (you grow or raise in cycles) | Cost the whole cycle, including losses |
| A service business (you sell your time and skill) | Set a rate that covers your pay and running costs |
Check before you act: Figures follow a fictional case and are illustrative, not benchmarks. Prices, wages and costs differ by place and change often; use your own figures.
Key takeaway
A business can be busy and still be closing. Most closures blamed on “no money” start with costs nobody counted; knowing your costs is how you stay open.
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