31
Dec

Interest Rates Subsidies for SME Loans in Nigeria.

One major factor blamed for stunted SME growth in Nigeria is access to affordable/cheap or single digit loans. In response to this, various single digit loan propositions have been launched by the Central Bank and the Nation’s foremost development bank, Bank of Industry (BOI).

Whilst these schemes do not really address the core of the challenges inhibiting access to finance in the segment, they do very well in attempting to reduce the cost of debt for the eventual beneficiaries.

My concern however is that these solutions have succeeded in addressing a relatively non-core issue. Businesses generally are supposed to generate enough earnings to cover their cost of capital, otherwise businesses unable to do so should not exist.

Firstly, what is the actual cost of debt in Nigeria? To get us thinking in the right direction, I will use simple metrics to estimate:

  1. The Government currently pays approximately 18% to borrow Naira for 1 year through Treasury Bills. This means that a non-bank Lender should expect a minimum of 18.5%PA return on every loan created that has a 100% repayment guarantee. This rate I call the risk free rate.
  1. Because of the credit reserve ratio, banks can only lend out approximately 80% of deposits placed with them. This increases the expected risk free rate to approximately 23% (18.5 ÷ 0.8)

The implication is that ideally, today, no loan is meant to be created by banks for less than 23%PA. Note that we have not factored in  risk premium and other variables.

As a result, one would want to ask, who pays the subsidies on the single digit intervention loans? Have we measured the impact of these interventions to see that they are not enriching a few businesses that are even hardly SMEs? From experience we know that such subsidies many times lead to unhealthy arbitrage.

I personally do not think there should be interest rate subsidy for bank loans in our system. If a business cannot produce returns (EBIT) above the risk free interest rate for debt in the operating environment, then such business should really not exist. If they must remain, then they must increase the profit on their services by increasing prices or reducing costs sufficiently to cover their cost of capital.

I actually think interest rate intervention schemes only dare to treat the symptoms of the sickness. The real sickness is that the cost of running an SME business is high – from cost of power that we cannot readily control, to taxes and levies that can easily be dealt with. The real sickness is that primary producers can hardly price their products properly because they are fragmented and do not have access to the market. The real sickness is that undocumented payments for imports enable importers to under-declare invoices, hence pay lower duties thereby make locally produced substitute products seem more expensive… The sicknesses are quite a few.

Therefore, when next we think about single digit interest rate loans for SMEs in Nigeria, we should remember that the costs of these loans are over 20%. Whilst interest rate interventions are not sustainable solutions that will boost growth and competitiveness, someone will still bear the cost of such subsidies… Probably, unpaid public servants may just be the ones bearing this cost.

My View.

Compliments of the New Year!

Obinna | @ukachukwuwrites

31
Dec

Incentives for Small Business Owners in Nigeria

Start Smart Series – Part 3

One of the issues facing small business owners in Nigeria is lack of finance and inadequate management expertise. Not surprisingly failure rates of small businesses is very high (estimated at about 80% within the first 5 years). This is further emphasized by the fact that most Nigerian youths are afraid to start their own businesses.

The draft National Policy on Micro, Small and Medium Scale Enterprise (MSMEs) stated the importance of MSMEs as the primary source of new jobs and the critical breeding and nurturing grounds for domestic entrepreneurial capacities, technical skills, technological innovativeness and managerial competencies. This cannot be better said as small business owners are a critical part of the economy and the business environment in Nigeria. The Nigerian government, in recognizing this fact, has put in place a number of incentives to encourage micro, small and medium enterprises (MSMEs).

The popular saying that knowledge is power is true as lack of knowledge of these incentives have prevented many entrepreneurs from taking advantage of the opportunity. In this part of our Start Smart Series, I have put together some incentives available to business owners in Nigeria:

 

  1. Graduate Entrepreneurship Fund (GEF)

Targeted at serving NYSC members. It is a financial aid given to NYSC members who have a business plan in one of the identified 35 MSMEs clusters. You can look up details at http://www.boi.ng/graduate-entrepreneurship-fund.

  1. Sure-P Graduate Internship Scheme (GIS)

Opened to all business owners between the ages of 18 and 40 years. It is a skill development training incentive. For details, see http://www.wealthresult.com/finance/small-business-federal-grants

  1. SMEEIS Youth Entrepreneurship Development Program (YEDP)

Opened to members and non-members of NYSC and those who possess a verifiable tertiary institution certificate or artisans with First School Leaving Certificate or a technical certificate or accredited proficiency certificate from the National Board for Technical Education (NBTE), whichever is applicable.

It serves as a financial aid for startups and expansion projects in agricultural value chains (fish farming, poultry, snail farming, etc.), cottage Industry, creative industry (tourism, arts and crafts) and Information and Communications Technology (ICT), among others. Read more about it at http://www.cbn.gov.ng/Devfin/yedp.asp

  1. SMEDAN Business Support Centres

Opened to all entrepreneurs; it is a vocational and entrepreneurship skills training organized by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN). You can check out more about them at http://www.facebook.com/smedaninfo

  1. LIFE (Learning Initiative for Entrepreneurs)

This is a free online training on different business skills for all entrepreneurs. See more at http://www.life-global.org

  1. National Enterprise Development Programme (NEDEP)

This is a skills acquisition, entrepreneurship training/business development service (BDS) and access to finance initiative. See details at https://www.facebook.com/nedepentrepreneurs

These are just a number of incentives available to business owners which can go a long way to ease the journey towards running a successful business.

All the best in your entrepreneurial journey.

31
Dec

ACCOUNTING 101 FOR STARTUPS

Start Smart Series – Part 2

Starting a business can be daunting but running the business successfully is the real deal. Running a successful small business starts with the planning stage of deciding what you will sell and where you will locate your business. However, it doesn’t stop there, as everything from your choice of employees to your accounting practices may influence your potential success. If you are smart, you will start right and start smart.

Starting smart begins with understanding “business essentials”, and a major aspect is accounting.

It is said that accounting is the language of business. It simply means that without accounting, no one truly knows what you are doing – even you too. The financial viability of your business is in doubt, business growth cannot be measured, and bankers don’t know if they can take the risk of providing credit to your business. This is aside from the fact that you will lack any probable basis for planning or making major decisions.

Accounting is the process of analyzing and reporting on the financial transactions of a person or an organization. It is therefore an important function of your business.

With a proper accounting system you are able to:

  • understand the financial health of your business

  • save money and reduce wastage

  • secure additional funding/bank loan in the future

  • make plans and achieve long-term goals

  • determine accurately how much tax to pay (without being ripped off by the man)

Small business accounting requires an entrepreneur to learn common accounting terminologies. Let’s take a look at the basic accounting reports that every business owner should prepare and review on a regular basis:

  1. Income Statement

This is also known as the Profit or Loss (P/L) statement. It shows how much you made in revenue, how much you spent, and what your profit or loss is over a specific period of time. Are you making or losing money? Are you spending too much on an expense? The P/L statement will tell you.

  1. Balance sheet

This provides overview of your business financial health. It shows the worth of your business. That is, a summary of your business assets and liabilities. In simple English, it tells you what you own, what you owe and what is left over.

  1. Cash flow statement

This captures how cash flows in and out of your business over a specific period of time. It captures cash flows in three categories: operations, financing and investing. Operations cash flow refers to money flows from normal business operations. Financing cash flows captures cash inflow and outflows from buying or paying off assets and liabilities the business uses for more than a year. While Investing cash flows captures capital inflows and outflows from investors (that is, from the entrepreneur, bankers, other funding parties)

If you desire to run a successful business, it would be beneficial to have an accounting system in place. This would ensure that you are accountable for the success of your business. It will also demonstrate that you are genuinely interested in growing your business. This will show that you are clearly ready for business!

31
Dec

Essential Considerations in Developing Business Plans for New Ventures

Starting a business without a business plan is like venturing into a race without a clear direction, thereby posing serious challenges for the fledgling business. Shockingly, a reasonably large percentage of businesses in Africa operates without a business plan.

Under normal circumstances a new business venture should have a clear purpose, usually to satisfy specific customer needs which will in turn define the future of the business venture and its expected growth trajectory.

This article examines essential considerations in the preparation of business plan for new ventures, by exploring definition and purpose of a business plan, basic considerations in the preparation of business plan, and benefits new business ventures stands to benefit in designing an effective business plan

A business plan defines your business value proposition, articulates your operations and business objectives. It provides specific and organized information about your company and business. It enables you, as a senior manager of your business to look ahead, allocate resources, focus on key areas and prepare for both current and future challenges and opportunities. In summary, a business plan is necessary as it:

 

      • helps you to define your business and focus on your aim

      • helps the business owner to identify weaknesses of planning process

      • serves as selling tool when approaching investors and financial institutions

      • serves as a tool to get opinion and advice of from professionals, mentors and colleagues

In preparing a business plan, it is usually advisable to limit unnecessary future projections, given that short period, current realities of your business may be different from the initial idea, which technically means that short term objectives are more realistic.

Also, you need to spell out risk management strategies and continuity plans in case of business adversities. You should however keep the language and explanations simple and brief.

Business planning is based on specific hypothetical scenarios concerning the business. In more practical terms, to make the business plan suitable for its purpose, it is appropriate to dig into helpful resources on the internet where real samples of business plan and good ideas on how to compile your own plan for your business purpose can be obtain.

In summary, a standard business plan for whatever type of business should contain the following components: Executive Summary, Table of Contents, Company Description, Products or Services, Marketing Plan, Market Analysis, Operational Plan, Management Plan, Financial Plan and Appendices. Details of expectations on contents are provided below:

Executive Summary

This is the opening section of a business plan. It provides compact and concise outline of the whole plan. The section should contain information such as the nature of the company, product and services to be provided, uniqueness of product or service, managers of the business and the extent of the capital requirements, performance and return expectations. It is the most important section of a business plan, as such it is important to make the section interesting. Table of Contents

This should be restricted to a page and it should contain list of everything your plan includes with the page numbers.

Company Description

It is another essential content of a business plan and should contain information about how company started, growth story, current status, plans for  the future. A bit of history and performance could be added.

Products or Services

This section should be designed to focus on customer benefits, through answering the following questions: what products or services will the business offer and what makes them different/unique..

Market Analysis

This section contains information on research you have done on the industry and market, value chain, government regulations, opportunities, customer behaviours and other related market information.

Marketing Plan

This section examines current market segments, your specific target market, their location (where you can find them), market needs, channels (how you can reach them) and marketing strategies (how want to capture the market).

Operating Plan

This section discusses critically what is involved in effective execution of the business plan. It takes into consideration value proposition, marketing strategy, pricing strategy, promotion strategy , distribution strategy  and other related operational considerations.

Financial Plan

This section includes details such as sales forecasts, cash flow statement, cash flow projections, balance sheets, performance metrics and other financial information.

Management Summary

Provides information about the management of the company, the people on the Board of Directors, and individuals responsible for day-to-day management of each department.

A business plan usually include appendices. This is where detailed information and references which are necessary/important but could make your document clumsy and boring are included. Research sources, detailed profile of management, are examples of items to include in appendices.

Conclusion

In conclusion, a business plan is like a steering wheel of a business. It keeps management team informed about expectations at each stage of the business venture. It also provides the business owner with detail plan on  business milestones and growth path. It is also used to convince investors that the business in question is the right business to invest in. It is hence an essential managerial tool for business ventures, new or existing.

30
Dec

Tax Obligations of Sole Proprietorships, Partnerships and Incorporated Companies

It is no longer news that the Nigerian government has become increasingly keen on enforcing compliance with tax laws. Therefore, it is important for business owners to have basic knowledge of Nigerian tax system. To start with, different levels of government make laws and regulations related to taxation of businesses and individuals, respectively. Hence,  a first step will be to understand the various taxes and levies  administered by Federal, State and Local Governments in Nigeria.

A reference point would be the Taxes and Levies (Approved List for Collection) Act CAP T2 LFN 2004. Some interesting highlights include making it unlawful for Tax Collectors to mount roadblocks for the purpose of collecting taxes. In addition, there are limits to the use of Police to enforce tax collection.

For business owners seeking to know their tax obligations under the law, provided below is a succinct guide:

  1. Sole Proprietorships and Partnerships

Taxation of  sole proprietorships and partnerships are somewhat similar as both are subject to the Personal Income Tax Act (PITA), which makes provision for the direct assessment of the tax liabilities of the business on the sole proprietor or partners.
“Partnership” and “Sole Proprietorship” as business entities do not pay income tax. Rather, the tax (that is, the Personal Income Tax) is levied on the owner’s  share of profit after the distribution of the profit or loss made by the business.

For a full understanding of your tax  obligations, you can consult the Personal Income Tax Act.

In summary:

  • Your partnership or sole proprietorship is not ‘itself’ chargeable to tax
  • What is chargeable to tax is the share of profit from the partnership or sole proprietorship.

 

  1. Incorporated Companies

An incorporated  company, for tax purposes, is treated as a separate legal entity from the owners and therefore pays taxes accordingly. Based on the Companies Income Tax Act, the income of a company on which tax is payable are  the profits of a company from whatever source and irrespective of whether such profits are distributed as dividends or not.

Hence, your company should do the following as far as the tax law is concerned:

  • Find out if the income accruing to your company and its line of business is chargeable under the Companies Income Tax Act. You can share your line of business with me so as to enable me give a proper advice in this regard.
  • Pay 2% of your assessable profit as annual Tertiary Education Tax. This tax represents your company’s social responsibility to the Nigerian education sector.
  • If your company does any of the lines of business stated below, and have an annual turnover of NGN100M (one hundred million naira) and above, your company will be mandated by law to pay 1% of its profit before tax or the net profit figure as disclosed in your company’s account as the National Information Technology Development (NITD) Levy. The businesses affected are:
        1. Banking and Non-Bank Financial Institutions (NBFIs) such as capital market operators, mortgage institutions and microfinance banks
        2. Insurance Services and Brokerage
        3. Cyber and Internet Services
        4. Pension Fund Administration, Pension Management and allied activities, and
        5. GSM Services and Telecommunication.

 

  1. General Tax Duties Affecting Sole Proprietorships, Partnerships and Incorporated Companies

  • Value Added Tax (VAT):

VAT is an indirect tax imposed on the supply of services and goods in Nigeria, except for items that are exempted by the VAT Act (please consult the Value Added Tax Act for more information). VAT is calculated at 5% flat rate.

Every business owner in Nigeria (whether an incorporated company, sole proprietorship or partnership) is required to be an agent of the Federal Government to collect and remit VAT (Value Added Tax). Your duty is to include 5% of the total goods and services supplied as VAT on your invoice when sending to your clients/customers. When you receive payment, the VAT should be remitted to the Federal Inland Revenue Service (FIRS) on or before the 21st day  of the month following the month the goods or services were sold. For example, VAT collected in January should be remitted on or before 21st February.

  • Capital Gains Tax:

When your company (whether incorporated company, sole proprietorship or partnership) sells an asset, it must pay 10% of the chargeable gains accruing from the sales. For purposes of computation, you must be guided by the provisions of the Capital Gains Tax Act.

  • Withholding Tax (WHT):

WHT is an advance payment of tax and is deducted at source. By implication, your company (whether an incorporated company, sole proprietorship or partnership) merely acts as collection agent for onward transmission to the appropriate tax authority. Your company should deduct at source the WHT from gross payments made to individuals, partnership, community trustees, executors, family and body of individuals in respect of the following income sources:

    • All aspects of building, construction, civil work and related activities;
    • All types of contract activities or agency arrangements other than outright sales and purchase of goods and property in the ordinary course of business;
    • Professional services;
    • Technical services; and
    • Commissions

The current rates for withholding tax are as follows:

S/N

Types of Payments

Rates

(Companies)

Rates

(Individuals/ Partnerships)

1.

Interest, Rents & Dividend

10

10

2.

Royalties

10

5

3.

Building and Construction

5

5

4.

All types of contracts and agency arrangement, other than sales in the ordinary course of business.

5

5

5.

Consultancy and Professional Services

10

5

6.

Management Services

10

5

7.

Technical Services

10

5

8.

Commission

10

5

9.

Directors Fees

10

10

 

Conclusion

A good understanding of how tax system operates in Nigeria is necessary to the long term success of your business. It is therefore imperative that you embrace the knowledge shared in this article and use it to structure your business for purposes of effective compliance with government tax regulations.

 

Please note that the thoughts expressed in this article are the author’s opinion. This should not be used in making business or investment decisions and is not intended to serve as a tax advise.

29
Dec

3 Quick Tips to Measure ROI (Return on Investments) on Marketing Campaigns

These are quick tips to ensuring the money spent marketing your product translates to profit. After doing your homework expending time and detail to your design, using iconic graphics and styles, designing eye-catching suite of marketing materials, including advertising, direct marketing, and state of the art embellishments on branding, how you measure the effect of your hard work to your profits is key to making any progress related to your marketing expertise. How do you measure where each of your marketing Naira should be optimally spent to realize the highest return on investment from any given budget?

“Hilton Worldwide relies on technology to support its most critical marketing spend decisions across brands, portfolio and media types”

Martin Stolfa VP, Commercial Services Analytics Hilton Worldwide

Optimizing your marketing mix requires a predictive, dynamic and holistic approach to planning with analytics. However, if you are an SME (Small and Medium Enterprise) and don’t have money to purchase elaborate analytics platforms, what you need to do is devise a full proof strategy that-

· Mirror real life scenarios and answer your ‘what if’ questions.

· Maximize your marketing budget to better invest every Naira.

· Eliminate cumbersome guesswork to connect marketing spend to revenue.

To achieve this, these tips are keys to ensuring the job is well done.

1. Social Media– Use social media platforms to deduce your brand perception metrics including awareness, familiarity, favorability and purchase intent. Social media gives you the platform to immediately measure, it gives you real-time reporting and flexibility in selecting KPIs {Key Performance Indicators}, provides a custom view to evaluate and optimize results at each phase of the campaign.

Example-you can set up a short survey on product awareness on your product on twitter for free. Google analytics can also help and it is free to a measure.

2. Codes- Include codes that define the specific medium so you can actually measure the specific channel the campaign was received.

Example- For each promo advert you post on any medium, say a BRT bus, or UNILAG Cafetaria, ask that customers reference that to get some discount or voucher, etc.

3. Improve engagement through Play : Games, Trivias, etc- Find fun ways to engage your target audience outside of selling products to them, then get the opportunity to use survey monkey to get your analysis on engagement.

28
Dec

Affordable Alternative to Email Marketing

Email marketing is a great way to communicate with customers. As you may know however, simply blind copying a very large number of recipients is not allowed by most email services (Gmail, Yahoo, etc.). Even if you are sending emails directly from your server, you will realize that sending bulk mail directly will lead to your messages ending up in the spam folder of your contacts.

In the light of this, mailing list services such as Mailchimp, Constant Contact, etc. were created. These services provide easy ways to send newsletters in a reliable way (that is,  without ending up in the Spam folder). Most of them also have a free plan that enables you to send messages to a limited number of contact at a limited frequency.

However, as your contact list or email frequency increases, you may discover that these newsletter services may become rather pricey. Also, with the high exchange rate and the limitations many banks have now placed on naira denominated debit cards for dollar purchases, paying for your newsletter subscriptions can become a heavy burden. 

Therefore, it is important to creatively explore alternative avenues for email marketing without having to break the bank. One such way is a combination of Amazon SES and a self hosted newsletter application such as PHPList.

Amazon Simple Email Service (Amazon SES) is a cost-effective email service built on the reliable and scalable infrastructure that Amazon.com developed to serve its own customer base. More information about the service can be found here: https://aws.amazon.com/ses/.

PHPList is a self-hosted email marketing application that helps you send bulk email, manage subscribers, plus other functions etc. It is a very robust and popular email marketing application.

The idea is to set up PHPList on your server and configure it to send email through Amazon SES.

Let us look at how cost effective this combination is. For illustration, if we have a contact list of 5,000 recipients and are going to use Mailchimp to send newsletters to this list regularly, the cost will be $50 per month! (MailChimp’s pay as you go option is not worth considering as it is only for infrequent email sending and hence not cost effective).

For Amazon SES, email messages are charged at $0.10 per 1,000. The cost will be just about $0.50 per email blast. Assuming two newsletters per week i.e. 8 newsletters per month, this will cost just about $4.0! That is a difference of $46, compared to Mailchimp! Also, the great thing about Amazon SES is that it is postpaid! You only pay for emails you send. If you do not send any email in a month, you will not be charged. However, with services such as Mailchimp, you are charged automatically every month regardless of if you use the service or not.

What you will need:

  1. Your own hosting account. You need to have hosting that supports PHP and MySQL/MariaDB. Most Linux hosts (which are the most popular) support these requirements. You will need to install PHPList on this account. If you are not a tech savvy person, you might need to find someone who can assist you with the installation. Also, many hosts provide one-click installers to help you with the installation.

  2. An Amazon web services account. You can easily create one here: https://portal.aws.amazon.com/gp/aws/developer/registration/index.html?nc2=h_ct

Instructions on how to configure PHPList to work with Amazon SES can be found here: https://readmode.wordpress.com/2015/04/27/amazon-ses-with-phplist/ . I advise that either you or your consultant reference that page during the setup process.

Thanks for reading!

28
Dec

Quality Service as Competitive Edge

Today’s marketplace is extremely competitive, offering thousands of products and services accessible at customers’ fingertips. The single distinguishing factor in attracting new and retaining existing customers is increasingly becoming ‘service’.

“The battle for repeat business is critical to long-term success in today’s intensely competitive marketplace. Customer Service is not just a competitive edge. In many industries, it is the competitive edge. Service is the new standard by which customers judge performance.” – William Band

Customer Service is really selling. It is what inspires a customer for return purchase more often. Customer Service is not only the responsibility of the customer service personnel, but also of the overall involvement of all stakeholders in the organization. The quality of service offered in an organization greatly impacts on the bottom line result.

The only competitive advantage available to an organization in a service economy in which everyone is providing essentially the same level of quality service. It has become a long-term competitive advantage for businesses in competitive markets. Irrespective of the industry, the approach to service delivery plays a vital role in the accomplishment of any organization’s corporate goal. It must be planned, strategically implemented in line with customer expectations and appropriately measured for improvements.

Sometime, we are all in a marketplace where all contenders are offering the same product with similar prices and almost the same marketing strategy. If there is a service element in any activity, then there can be a competitive advantage.

Quality Service should ingrained in every department of the organisation because, ultimately all activities impacts on the perceived final quality of the product and service experienced by the customer. In rendering outstanding and impeccable service, one’s attitude plays a vital role. We must continuously express thoughtfulness, show courtesy, integrity, helpfulness, efficiency, availability, friendliness, knowledge and professionalism in our work.

It is worth noting that poor services eat away at a company’s reputation. Your customers deserve to always experience an impeccable service, which in turn triggers a longing for repeated business.

Whatever you are engaged in, your service is a reflection of your brand and commitment to proffering a memorable customer experience. Let quality service be your competitive edge in the marketplace.