If you are a chief executive of any institution, increasing prices of your product must be the last thing you do to make a profit.
The first thing any business must do is to cut costs. Faced with tough operating environment, finance managers spend long hours in boardrooms until they find ways of cutting wastage in their organisations.
All unnecessary costs they can do without are dropped. If after cutting all costs fail to keep the organisation above water, the second strategy is to increase sales. For instance, if you were selling 500 loaves of bread, you will try to see how to sell more loaves without significantly increasing their costs. This is the volume strategy, the time managers increase pressure on their sales teams to spend as much time as possible on finding new buyers of their products.
By selling more of their products at the same fixed costs, the company increases its chances of breaking even and eventually making a profit, without touching on its price tag. It is only after doing this and you are still unable to cover your costs that you can toy with the idea of increasing prices. And even when you do that, one must be careful not to increase the prices above what consumers are willing to pay to have it. This is what economists call price elasticity.
If your product becomes unaffordable to your buyers, increasing prices only makes your problems worse. This is why it must come last.
Looking at the Jubilee government, you will be lucky to find any significant push to cut costs. In fact, instead of cutting costs, the government continues to sign up new projects, increase an already bloated wage bill, and take up additional loans for projects that can wait.
Loans are a cost centre as they come with interests and when they are due, they become the first expenditure item. But his government has been taking up loans at a speed that no other regime has done in the past.
The appetite for loans has been so huge that President Uhuru Kenyatta flew to China to take up an additional Sh380 billion for the Standard Gauge Railway without first completing a feasibility study. The Transport Cabinet Secretary and his entourage were ready to commit the country to more loans only for the Chinese to ask them to go slow.
Instead of reducing the wage bill, the government continues to hire more people. It would be forgivable if the new jobs were given to young Kenyans. Instead, retired civil servants, some who would rather be spending time with their grandchildren, continue to get plum jobs. The Auditor General continues to capture this wastage across government departments year in year out. To increase the tax base, which is similar to increasing sales, President Kenyatta should have asked the taxman to ensure every Kenyan pays their fair share. Just how many times have businessmen bribed to pay less and get their tax records sanitised? There are so many people getting away with taxes. Majority of Kenyans are employed in the informal sector and the taxman has been barking in darkness, with little ideas on how to get them. Landlords have also laughed at all the attempts to get them to pay taxes. But instead of first exhausting these avenues, the government chose to increase taxes.
Uhuru had the choice of taking the easy populist path of signing the Finance Bill into law and ending the misery of Kenyans. Instead, he chose to take away half the suffering, saying Kenyans must feel some pain to enjoy the free primary education and better roads.
As Kenya’s CEO, he should not have been too aloof with the happenings in Parliament. He should not have allowed bureaucrats in the National Treasury to push him into a corner and leave him no choice. Kenyans do not need to suffer from these mistakes.
- The writer is an investigative writer with The Standard.