Femi Oladele, Author at msmehub2

Impact of the CBN’s Reviewed Interest Rates on MSMEs

Introduction It is a routine for the Central Bank of Nigeria (CBN) to review rates from time to time; this is not an anomaly – it is best that I establish this fact so that it does not seem like what the CBN has done is unusual. However, this is the first time that rates are this high in Nigeria. The new CBN rates as shown in Figure 1 below highlights significant changes that have taken place and the policy directions of the new CBN, led by Mr. Olayemi Cardoso. Interpretation of the CBN’s Reviewed Interest Rates Generally, the rates impact the availability and accessibility of money (lending, borrowing) in Nigeria. They pretty much determine how much you pay to ‘borrow’ money and how much you get when you ‘invest’ your money. Specifically, for Micro, Small, Medium-sized enterprises (MSMEs), the MPR (Monetary Policy Rate) is the most significant, because the other rates directly impact Deposit Money Banks (DMBs) more than businesses. In simple terms, as a business owner or manager, you cannot access funds (except for special alternatives, which is not covered in this article) at interests less than 22.75%. CBN’s Reviewed Interest Rates: Practical Implications for Existing Borrowings Given the inevitability of credit (debts, borrowings) and its attendant interest overlay, MSMEs should begin to prepare for notifications from their Creditors (payables). Facilities obtained from regulated financial institutions are subject to these changes based on the agreed terms and conditions. Managers and owners of MSMEs should review their terms and conditions to see if the new rates are applicable. It is likely that general purpose facilities are affected. However, specialised facilities such as those obtained from the Bank of Industry or other special sources may not be affected. These terms are clearly spelt out in the conditions signed before obtaining the loans. Managers and owners of MSMEs may need expert advice to know how to respond to their creditors. But here, I give general advice: 1. Refrain from Panicking This news comes at a time that the economic landscape does not make businesses looks good – rising costs, loss of labour, increasing compliance costs amongst others. Human instinctive response might be panic, but this is not the time for panic at all. Rather, panic can aggravate your emotional condition and lead to depressive behaviours. It is best to remain calm, albeit this is easier said than done. This news will definitely draw from your emotional bank and support systems. If you have a strong one in place, the impact will be minimal. If you have a low deposit in your emotional bank or a weak support system, you might feel the impact more, but all is not lost as you can quickly ‘buy’ some deposits. I trust that there are mental health specialists that are willing and able to help you through this times. 2. Respond to your Creditor’s Communications Non-response will not make the ‘problem’ go away. It is better to keep the lines of communication open. You started on a good note with your Creditor, don’t break that relationship because of this situation – it will pass and when you look back afterwards, you will be glad you handled it better than using abandonment. I would therefore recommend that you respond to emails, calls and other means of communication. Let them know that you honour their relationships even if you are immediately unable to meet their new demands. 3. Restructure Existing Borrowings Most Creditors should be open to a restructuring especially if the new rates apply to the existing facilities. Even if they do not necessarily apply, it is better to restructure your borrowings if you can. CBN’s Reviewed Interest Rates: Practical Implications for New Borrowings This is as clear as noon day. What this means for new borrowings is that accessing loans will now come at the new rates. General purpose facilities will now go for 22.75% plus management fees and other fees. This implies that around ₦300,000.00 will be required as interest on a facility of ₦1,000,000.00 (this is only a simplification of the calculation). It is best to look out for the nitty-gritty of terms e.g., straight line or reducing balance rates, annual or monthly rates etc. so that businesses can easily prepare their cash budget to meet these obligations. A general note of advice to managers and owners of MSMEs is to determine the suitability and sustainability of this rate on their operations. If this new rate is too high for the type of business, it is better to either stay off new borrowings or source alternatives. CBN’s Reviewed Interest Rates: Practical Implications for Excess Liquidity Some businesses might be struggling to survive in this economy, while some might have excess liquidity. It is not business wise to keep excess liquidity in a business, hence businesses with excess liquidity can take advantage of this time to invest and get better returns. How then can a business know that it has excess liquidity? Liquidity is not just having money in the business account. From the bookkeeping perspective, there are two main methods used to determine liquidity. Please note that there is a significant difference between liquidity and profitability. Interestingly, there is a paradoxical relationship between both such that a business can be profitable but not liquid and another can be liquid but not profitable. Alternatively, a business can be both liquid and profitable while another can be both illiquid and unprofitable, but that is not the focus of this article. N/B: Current assets are assets that accrue to a business in the short term (less than or equal to 12 months) and they include inventory, receivables, prepayments (advance), cash and bank balances. Current liabilities are obligations that fall due in the short term such as interest payments, overdrafts, payables amongst others. Conclusion According to the CBN, this measure is to tighten some monetary indices and strain inflation. It is believed in economic circles that this decision is not for the long run, however,

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Make or Buy Decision: What Do I Have to Lose?

Business decision making is not an easy road. Ironically, perhaps unfortunately, it is a road taken way too often by both intrapreneurs and entrepreneurs with significantly threatening outcomes. It is easier to take instruction than to be the one to determine the pathways to outcomes, hence it is good to have some fore knowledge of how to take those decisions. Asides the fear of the rebound/boomerang of decisions, the fear of being able to handle decision outcomes is significant. With the current market situation, how businesses decide to either ‘make’ or ‘buy’ a component of a product/service, or an entire product/service is significant for both process and product costs including profitability and liquidity. This article focuses on both quantitative and qualitative considerations that business managers should assess before taking a “make or buy” decision. What is a Make or Buy Decision? In basic terms, a “make or buy” decision puts businesses on an uneven pedestal, much like a pendulum – wherever you swing has costs and potential benefits which can be predetermined, but actual impact is known only after the decision has been made. Few examples include the decision to ‘make’ or ‘buy’ ready-made spices, napkins, engine spares, oils, chips. For services, it might be a decision to outsource a business, HR, accounting, or other processes. For accounting purposes, it might appear easy to determine the cost of ‘buy’ decisions – product or service cost plus any incidental costs, that’s all. But for decision making, it is not that easy especially when you have to compare with a ‘make’ option. This becomes complex, because you have to imagine alternative forgone (opportunity cost, remember this from elementary Economics?) – school no be scam o. An understanding of how opportunity cost works is important in business decision making. To ensure that we can apply a critical and analytical approach to our business decisions with respect to “make or buy” decisions, below is a fictitious example. The highlighted lessons can be applied to most scenarios even very complex decision situations. MTY Ltd. is opening a new plant in Ikeja, Lagos State that would produce 500,000 units of brake discs monthly. Two suppliers of a significant component used to produce brake discs submitted a quote of ₦760.00 and ₦710.00 per unit including freight and insurance. MTY Ltd. has the capacity to produce 700,000 units of this component in their Ota, Ogun State factory, which has become out of use for over a year. The associated cost of producing one unit of the component in their Ota factory includes Materials – ₦90.00, Labour – ₦250.00, Overheads – ₦350.00. Transportation from Ota to Ikeja is currently challenged due to the state of the road. The choice to produce at the Ota factory comes with commitments to labour and environmental laws, while excess production can be sold at the open market. 3 Decision Scenarios from the Example Above 1. Buy from the cheaper supplier This looks like the best solution especially if management is looking at minimising cost. Some drawbacks to consider on this decision include quality assurance. How can MTY Ltd. verify the quality of the component as well as alignment with their brake discs specification? Would using the component require additional production cost? If MTY Ltd.’s customers are aware that a significant component of their brake discs is outsourced, would it influence their purchase decisions and how? In this era of sustainability, to what extent does the supplier align with the SDGs in their production? Does the supplier comply with government regulations and industry standards? 2. Buy from the more expensive supplier There is the bandwagon effect of higher stakes – “because it is expensive, it has to be good”. This is not always true. Management would like to justify the extra cash. Why are we paying more when we can get it for less? The other questions about compliance and customer perception are relevant here as well. 3. Produce at the Ota factory This is the make decision scenario. The quantitative cost of the component is what a Performance Manager (Cost/Management Accountant) is trained to compute based on certain principles and assumptions, which I will not highlight due to space constraints, but I will give a simplified outlook. Materials: ₦90.00 + Labour: ₦250.00 + Overheads: ₦350.00 = ₦690.00 At a glance, this looks cheaper than both ‘buy’ decision scenarios, but considering the full situation, it might not necessarily be cheaper. Transport cost from Ota to Ikeja is not included in the computation. Labour and Environmental compliance cost for maintaining the factory is not included in the computation as well as the fact that the factory has been out of use for some time which might require some repairs or upgrade. On the flip side, producing at the factory gives more assurance of quality except management deliberately desires to produce low quality components. The prospect of selling excess capacity at market price is also significant. Asides taking a part of the component’s market share, there is brand visibility that production can confer. Conclusively, there is no straight forward answer to any “make or buy” decision scenario. Availability of credit options can become an appealing and compelling consideration for ‘buy’ decisions, while quality assurance and the need for brand visibility can drive ‘make’ decisions. Businesses are advised to consult professionals before taking a “make or buy” decision as they are trained to identify areas of advantage and leverage.

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The Importance of Policy Documentation

Seyi and Sewa are partners in the consulting business and have been doing business for more than ten (10) years but were recently confronted with a decision to submit their financials for three years to qualify for consideration for a government project. They were alarmed to know that they had previously not kept proper records and were only running the business on cash basis (how much cash comes in and goes out). Now that they need a proper financial statement, they are unable to meet the very tight deadline to meet the application. One of their friends advised them to meet with a consultant to discuss a remedy and they were advised on their first strategy meeting to consider adopting an accounting system. To prevent you from facing a situation similar to Seyi and Sewa’s in the future, this article emphasizes the importance of having well-documented policies for accounting, auditing, and other essential business functions. These policies can assist small businesses to mitigate risks and enhance performance by providing access to relevant information necessary for making informed decisions. The article will also address how to get cost-effective policies, as well as the implementation and periodic review process to ensure they remain relevant and effective. Importance of Policy Documentation Small businesses usually question the relevance of some compliance practices such as tax, accounting, auditing, and strategy. They ask: why should we “waste” our lean resources (human and others) pursuing non-valuing adding practices? A simple answer is that these mostly taken-for-granted practices can minimise the risk of emergencies, failure, and save the day. For example, I like to compare them to “back up” which can easily be used to “restore” your operations when things go south. Given that businesses face significant risks, there is the need to do all that is possible to mitigate those risks and drive productivity and sustainability. Many small businesses are setup using the owner-manager model and do not vividly appreciate the need for these business practices and services that potentially enhance their ability to thrive. Should a small business be considered too small to be bothered about policy? You can find information about what a small business is here. Policy, they say is for the big shot, not for small businesses. A very large fat fallacy. Why? If you agree that you need proper accounting records, then why do you disbelieve that you need documented policies to guide the operations of the system that should produce those accounting records? Accounting records give insight on the performance of a business and allows comparison and informed decisions on special decisions. Without such information, it is quite difficult for businesses to stabilise and grow considerably. One of the biggest importance of policy documentation is that it improves your business practices over time, since you can view the guidelines and review them as need be. It also help: Your accounting and other policies help to stabilise your business processes by ensuring that divergence from the “norm” is quickly identified. Given the advantage of policies, a business is able to within the scope of those operations compare their operating results or compare performance with a documented benchmark. As with human and all living things, there is growth and this comes with diverse changes. Policies help businesses to be able to revise their operations and align their operations with current realities. Having a policy is only one step I must add. Making it available and accessible is another step, while using it and reviewing as the business grows is another. Drafting a policy requires specialist skills, and there are businesses that can help you develop your business’ policies. You can contact an Accountant, Business Advisor or SMP (small and medium practice) to help draft or review your accounting and audit policies. Few of them are: AccountingHub Charles Ardor & Company Ltd FSC Professional Services Pundit Bookkeeping Services Limited

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When is it Safe for a Temporary Distress Price?

You would recall the article on product/service pricing and I hope it is helpful for you in determining the best price for your products/services. It is possible that after determining an appropriate price, you are unable to sell at that price because of the environment, economic situation, demography, social class, user/buyer preference amongst other reasons. However, the focus of this article is how and when to set a Temporary Distress Price (TDP), when the situation calls for it. What is a Temporary Distress Price (TDP)? This is a price below a product’s/service’s target selling price. Target selling price is the determined consumer’s uptake value of a product/service. This distress pricing is a decision to temporarily cut down the target selling price of a product/service to enhance liquidity, keep a significant customer segment and/or meet other urgent business need. When should you contemplate setting a TDP? I have seen stores sell products at a slightly lower price than the target selling price due to such products nearing their expiry dates. Others quickly run “promos” to sell off the products before expiry. This is a distressed sale not a temporary distress pricing scenario. TDP is triggered when: How to fix a temporary distress price? First, businesses must decide if they are a price taker or a price setter. A price taker has little or no control to determine product/service price due to market conditions, regulations etc., while a price setter has significant capacity to set price due to market coverage, capacity, leverage etc. In (highly) regulated markets, it is almost impossible to set a temporary distress price, hence the focus is on unregulated markets, where businesses can set prices reasonably. As a price taker, the preferred choice is to set a temporary distress price that helps to at least maintain a break-even point (no profit, no loss) or a positive contribution (where selling price is higher than variable cost). For price setters, they can flex their muscles based on shocks from other business units and set a temporary distress price arbitrarily. There is no specific (scientific) method for setting a temporary distress price. Qualitative considerations when setting a Temporary Distress Price How should you respond when your competitor sets a Temporary Distress Price? It is understandable that not all business will need to set a temporary distress price, however business owners and managers should note that a temporary distress price set by a competitor is a slightly higher potential competition for their product. If a competitor sets a temporary distress price that rivals your product’s/service’s price, then your sales might drop, you might also lose significant customers and market share. How then should businesses that may suffer the impact of this distress price respond to a competitor’s? First, be prepared for a price slide. The encouraging thing is that, if it is a TDP, it is only for a short time. If the price reduction continues for a long period, then it is most likely not it. Secondly, increase your market communication output. While doing this, it will be unethical to play dirty especially in online spaces. Finally, look for ways to improve production processes to reduce price, maintain or increase quality and provide excellent customer service. Conclusion Businesses may suffer setbacks for a while, but if it does not lead to death, business owners and managers can strive, thrive, and survive.

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How to Determine the Price for your Products

Determining the price for your products is often a challenging one. As an entrepreneur, you continuously ask yourself and others who care to listen; “how much should I charge?” Making pricing decisions worse are the intrigues of rising prices (inflation), unstable and largely unpredictable foreign exchange (FOREX) fluctuations. Without the aforementioned complexities, price fixing is a little bit dicey and puzzling, hence this article is to guide you in product/service pricing. The article explores what goes into determining the selling price of a product or service and how to manage the many questions that might bother the mind regarding determining an appropriate price, a suitable price, a sustainable price, and an unbeatable price as the case may be. Considerations What should be considered in determining the price for your products? I highlight some few points to consider below: Asides cost, there are varying schools of thought on the extent of things to include as well as their considerations. Some hold that you use an industry average, others go with intuition, while for some, it is pre-determined. For example, some persons hold the view that their profit loading on cost should be the barest minimum while others will charge the maximum. This is not the focus of this article, as I dwell majorly on cost determination. Pidgin English attributes “cost” to being expensive. However, for the purpose of this article, a layman’s definition of cost is the amount used to produce a product or amount incurred in rendering a service. In accounting, it is conventionally believed that the cost of producing or rendering a service is significant in determining its selling price regardless of other compelling qualitative considerations as highlighted earlier. Categories of Products/Services Broadly, in professional accounting view, there are four categories of products/services. Identifying your type of product/service is only a first step. Applying the principles of the four costing methods requires more than intermediate knowledge of accounting. However, since this article is written for general knowledge purposes, I will try to simplify some key principles. However, I must note that the need for a Management Accountant for pricing decision cannot be ruled out especially for growing businesses with varieties of products/services. Elements of Product or Service Cost In determining cost, entrepreneurs are encouraged to consider that there are three (3) elements of costs (materials, labour, and expenses/overheads). Simply, a quick formula to use to determine your product/service cost is: Product/service cost = Production cost (Direct cost + Indirect cost) + A fraction of Administrative cost + Selling and distribution cost + Profit loading. It is quite easy to determine direct cost, because they are directly attributable to the product/service e.g., wood for furniture. Indirect cost is harder to identify sometimes, because they are not directly attributable to the product or service. Any cost that goes into producing a product or rendering a service but cannot be directly identified with the product/service is indirect. Examples include factory electricity, factory supervisor’s salary, compliance fees, etc. For emphasis, electricity bill may be paid monthly, so it is difficult to say that product A or service X gulped Y% of electricity. To resolve this challenge, we apply apportionment of cost using both scientific and non-scientific methodologies. The same apportionment goes for administrative cost and selling and distribution costs except where directly identifiable. For profit loading, some argue that a % of total cost should be used, while some use an arbitrary or market-based %. (Please note that these broad-based calculations and assumptions apply largely to unregulated products and services.) Given these considerations, it should be easy to determine your selling price knowing that identifying and computing product/service cost is a significant step. The best way to compute product/service cost is to document all forms of cost incurred either considered relevant or not. Many entrepreneurs will for example not include the cost of their own service rendered in the production process assuming that profit will cover for them. But you should note that if you hire someone to do what you do, they get paid, so include your own cost if and when you contribute to the production process. Conclusively, what is an appropriate price, a suitable price, a sustainable price, and an unbeatable price? Appropriateness in this context means that your selling price covers all your cost including a profit load. However, as earlier mentioned, that may not be suitable for particular markets or jurisdictions. In this case, a suitable price may have to be determined, considering the market dynamics. A sustainable price as the name conveys is a price that is appropriate and includes social and environmental considerations. Finally, an unbeatable price relates to a market-based price that is generally accepted as minimum. Please note that in other contexts, this classification may differ.

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How to Choose your CFO Wisely

I start by highlighting that while Accounting and Finance share a thin line, it has been argued that Finance is an element or a subset of Accounting. However, their ends are the same – provision of information and insights to enhance decision-making. C-suite execs are appointed/selected based on academic and professional qualifications, exposure, and experience as well as other underlying considerations. This article underscores one of such considerations. The c-suite position of the Chief Financial Officer (CFO) is a high-level cadre with responsibility over the finances of an entity. Other c-suite positions include Chief Executive Officer (CEO), Chief Information Officer (CIO), Chief Technical Officer (CTO), Chief Security Officer (CSO), Chief Operations Officer (COO) amongst others. A CFO may be highly professionally qualified but be overqualified for an entity, while another entity might consider a CFO professionally underqualified. The article delves into intricate character-specialty of CFOs and how to make an informed choice. The CFO albeit has oversight over the accounting functions of an entity is not the Chief Accounting Officer – this is ascribed to the CEO who has overall oversight on the operations of an entity. The responsibilities of CFOs vary largely depending on size, ownership structure, and organisational culture amongst others. In appointing a CFO, by statutory regulation, there are certain requirements for specific organisations especially public interest entities (PIEs) and significant public interest entities (SPIEs). However, generally, a CFO should hold both academic and professional qualifications. I must note that currently in Nigeria, professional qualifications by ACCA, CFA, ICAN – in alphabetical order – are highly sought after. Beyond the professional qualification, is a significantly taken-for-granted phenomenon – “specialty competence”. Broadly, there are five (5) specialties in the Accounting and Finance profession – audit and assurance, performance management, taxation, financial reporting, and financial management. These specialities find relevance in both public and private sectors as well in both local and international markets. A (potential) CFO cannot be “jack of all trade”. Each (potential) CFO by interest, exposure, experience, and training aligns with a specialty and this is the question I address. Who does a business need as their CFO? An auditor? A tax expert? A financial management expert? A reporter? A performance manager? All five specialties are most assuredly represented in all organisations, while some are outsourced. Who should lead the team since we can only have one at the helms at a time. My take is this and quite subjectively – each business should review their peculiar needs and make their choice. This does not resound like a solution, but please follow on. Contingency theory helps us to understand that there is no best approach to a situation especially in different contexts, hence my escapist approach to the question of who should lead. Quickly, I will highlight few significant strengths and weaknesses of each specialty and I hope this should help businesses understand the behaviours of their CFOs too. 1. An auditor is prepped as a compliance officer and is wired for due diligence. As a CFO, they will “over scrutinise” communications that pass through their office. It is likely that the CEO and other management staff will have “issues” with them, and the major complaint will be – “don’t you trust me?”. Funnily, when an auditor hears this, it is a red flag to dig deeper. They tend to be quieter, “very” observant, a good listener and slow to act. They are critics, hence quickly identify errors. Businesses that want to develop their organisational structure will find them helpful in navigating thorny strategic issues. Additionally, given their grasp of regulations, they can ensure compliance, which is significant for businesses to thrive. 2. A tax expert is focused on maximising value for their organisation with respect to taxes. They have very good manoeuvring skills, and they use their skill to help in detecting loopholes in tax legislations and taking advantage of such loopholes. They are skilled planners, very calculative and quickly form relationships. Tax experts have the capacity to be manipulative and argumentative as well. A tax-inclined CFO will help businesses with planning, budgeting, forecasting and value. They understand the importance of value and help significantly in that regard. 3. Performance managers are tactical and strategic; always working towards value maximisation, optimisation, and realisation. They are more interested in results than process. Due to their high computational skills, ability for sensitivity analysis and tact, they are more vulnerable to quantitative results. Hence such a person as a CFO may not ordinarily consider qualitative factors that influence performance. They stick heavily to the numbers and always say that “numbers don’t lie”. A performance-based CFO is more suitable for established businesses. In a new business, they can drive performance but there is evidence that their driving force may be aggressive and inconsiderate. 4. Reporters are very versed, because of the awareness of all transactions and events in an organisation. They are not ordinarily involved in the approval process, but they are the dumping ground for all financial transactions and events. They also understand the implications of a transaction on the outlook of an organisation. It is believed that when an entity winds up, it is likely that a reporter would have resigned earlier. They know about the organisation and understand its financial position. Financial reporters are diligent and have eyes for error detection. They talk less and are confidential. The presentational skills of reporters are top-notch, and they also can be manipulative by presenting outcomes of similar transactions and events differently to different users. Reporters can help businesses to understand the implications of a transaction or event even before they occur. This helps planning and decision making. 5. Finally, but not the least are financial managers in charge of treasury. Their goal is how to raise funds and maximise value. As a CFO, they are more likely to be preoccupied with portfolio (investment) drives. Ordinarily, they are stingy and want justification for each spend. They are highly motivated and are not emotional spenders. A downside about

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Navigating your Business within the Nigerian Political Space

The Nigerian political space has a significant impact on businesses and their survival. This article proposes ways to navigate the political system in order to retain relevance without losing focus and direction. Political will is a strong and potent force with potential impact on business growth and survival. This is because it largely decides policies and strategies that create the enabling environment for businesses to thrive. No wonder it is listed as a core environment for business in PESTLE, SWOT, SCOT analyses amongst others. Political power influences legislations and capital flows, determines available infrastructure, specifies regulations, oversees compliance, and prescribes acceptable behaviours. Entrepreneurs must therefore ensure that they always carry a more-than-average understanding of the Nigerian political space, even if they desire to remain apolitical. Entrepreneurs must give themselves to understanding the: 1. Impact of political activities, seasons, and calendar on their businesses This is necessary to plan business activities and maximise value. Political activities can disrupt or facilitate business operations hence understanding the political calendar will improve business planning and operational level activities. 2. Dynamics and structure of government at the federal, state, and local levels including the branches of government – executive, legislature, and judiciary Due to the nature of the Nigerian constitution, each level/tier and arm/branch of government have coverage and limits. An understanding of these scopes and how they influence business processes, decisions, and operations are of significant value to businesses. An example is tax such that there are different relevant tax authorities for different categories of taxes. There are many other issues that fall within the purview of different tiers of government. 3. Influence of governance on policies and strategies that impact their businesses Political processes have a significant influence on businesses. No wonder there is a global index for measuring nations’ ease of doing business. The governance structure in place to facilitate business is significant. For example, understanding the provisions of the Free Trade Zone, Pioneer Status, Business Ownership, and the likes are significant for businesses. 4. The interplay of politics and economy Political power can influence foreign exchange, foreign direct investment, transfer pricing, remittances, and other economic variables. A good understanding of these dynamics will help businesses stay ahead of their game. The above knowledge requirements are significant, because one policy of government can halt a business. Many business owners especially newbies might retort that they are uninterested in politics, but it is imperative to understand that business is highly dependent on an ecosystem where political power wields significant influence. I highlight few things you can do to ensure that you understand how politics impacts your business and ensure that your business survives any political backlash: Subscribe to credible (time-tested) sources for up-to-date political information and analysis. Despite your personal views on politics, try not to bring your bias into your business operations especially when relating with governments. Retain the services of lawyers and accountants. Amongst other things, lawyers can help you understand the effect of specific legislations on your business, while Accountants can help you with compliance to especially financial regulations. For companies, it might be significant to appoint someone with requisite political wisdom to your board. Politics is a tricky space that requires requisite wisdom to navigate and remain relevant. No matter what you do, do not undermine the weight of political power on your business.

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Business Ownership in Nigeria

Introduction This article explores business ownership in Nigeria specifically matters such as ownership and control, succession, taxation, charitable giving (CSR), public accountability, internal reporting, and registration requirements. Is a business owner the owner because they are the owner i.e. because they contributed the main capital? What is (are) the limits of business ownership and how do you thrive in Nigeria owning a business? Before we continue, I must mention that there is no best ownership type/structure. What you might get is how to determine what’s best for you (including your peace or better still your mental health and emotional balance) and your business – survival and sustainability amongst others. Business Ownership Types in Nigeria First, the fact that you proposed a business does not make you the overall boss. Also, your significant financial contribution does not automatically confer ownership. Business ownership in Nigeria has many dimensions, and ownership implications change with peculiar situations and decisions. Before I delve into the specific implications, I will quickly highlight the business types in Nigeria: Considerations Founders want to know which business ownership type is preferable. Like I earlier mentioned, the most appropriate business type for you may change with time, location, and capacity of the business. For example, a merger or an acquisition potentially changes a business’ structure. You should consider the following when deciding what business structure to run with: 1. Funding consideration Your funding decision will significantly influence the type of structure to start with. There are basically two funding models – debt and equity. But you might say, I have gathered enough personal savings and donations to start – it is still debt since we hold a business as a separate entity to its owner(s). This position is limited with respect to sole proprietorship and unlimited partnerships in some situations. If you decide to start with your personal savings, it is okay to consider a partnership or a private company structure. I intentionally omitted sole proprietorship, because I believe it is best to share risk even if it comes with its own risks too. Considering equity? It means you are going for a company structure where other people can be part-owners with you and enjoy some levels of limited liability. Currently, in Nigeria, an individual (one person) can register a private company. 2. Liability Risk Preference There are many business risks, but here I highlight liability risk. You should understand your risk preference as it helps you stand in the face of liability. Basically, there are two extremes – risk averse and risk takers. It has been argued that all entrepreneurs are risk takers because they take some levels of risks. While this is true, be true to yourself and know your limits. Sole proprietorship structure exposes you to significant liability risks in the event of total loss of personal property or your inability to pay bills, which may even lead to bankruptcy. Partnership structure minimises liability risk, while company structure eliminates the risk. It is best to use your risk score to determine which structure to start or run with. The good thing about business structures in Nigeria is that you can cross-carpet after meeting certain regulatory requirements. 3. Ownership Goal Depending on your personal and/or family considerations, you might desire that ownership revolves within the family. For such desires, a partnership or private company structure are good options. If you do not mind allowing “outsiders” to have a stake in the business, partnership or private company options are good too. I must quickly add here that ownership is different from management. Many people fear that if they are not practically involved in the management of an enterprise, their stake could diminish. While this can be true, you can own stakes in an organisation and not be directly involved in its management but can appoint managers to carry out your strategic objective. 4. Tax Consideration Currently in Nigeria, sole proprietorship and partnership structures are not taxable, but their owners and partners are liable to Personal Income Tax (PIT). In addition to the PIT, such structures would also pay Value Added Tax (VAT) on taxable goods and services acquired. To shield your business from tax exposure, you may want to consider structures immune from taxes and grow from there. I must mention as well that small companies are sort of immune from some taxes that bigger companies must pay. There are also some tax incentives such as siting your business in a Free Trade Zone (FTZ) and/or applying for a pioneer status amongst other opportunities. 5. Survival and Sustainability I usually advice owners of family business to consider transitioning to company structure when the arrowhead of their business is retiring without an interested family member. For example, a great educational facility might go extinct if none of the children of the Proprietor is willing to take over leadership of the school. In this case, the family can decide to transition to a company structure and allow capable hands to manage the business while the family interest is protected by ownership. 6. Profit Taking Entrepreneurs may be interested in causes other than profit. For such causes such as health, art, or education, a business owner may wish to establish a not-for-profit entity. This implies that a private company structure limited by guarantee may be a good option. However, if the motive is profit-making, then other structures are the way to go. 7. Public Accountability Having public accountability implies that a reporting entity is required by Law to publish its financial statements and make it public. The Securities and Exchange Commission (SEC), Corporate Affairs Commission (CAC), Nigerian Exchange Group (NGX) and other agencies of Government have powers to sanction erring companies – companies required to but who refuse to make their financial statements public within the stipulated timeframe. All publicly listed companies have public accountability. However, I must note that there are limitations to the public accountability rule. For example, Pension Fund Administrators (PFAs), most of who are private companies, must make

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