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Financial Management and Reporting

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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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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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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How to Develop a Financial Plan

A critical component of your business plan is a strategy for managing your company’s operations. A comprehensive financial plan needs to answer the following questions: Strategy Describe how you will fund and grow your company Financial projections Income for 3-5 years Balance sheet Cash flow Breakeven analysis Sensitivity analysis Assumptions – revenue forecast, cost of revenue, margins, expenses Funding Equity Debt Non-traditional – customers, suppliers, partners Risks Describe the risks associated with the implementation of your plans. Market – size, sales cycles, price consumer will pay Competitor’s pricing – predatory pricing Strategic – volatile industry, establishing agreements Operational – managing components, costs, quality Technology – will it work, scalability, time to develop Financial – exchange rates, interest rates Macroeconomic – state of the economy, regulatory laws, government approvals In summary, a financial plan should describe the process for capturing the value from the delivery of your product/service and is a critical element of your business planning exercise. For more posts from this author, visit: www.gloryenyinnaya.com

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Key Factors that Hinder SME Growth

According to a report published by the World Bank, it was observed that while Small and Medium Enterprises (SMEs) create 7 out of 10 jobs in emerging markets, access to finance has remained a key constraint to SME growth. The Report noted that access to finance is one of the most cited obstacles facing SMEs to grow their businesses in emerging markets and developing countries. While access to funding is a challenge for most SMEs across the world and especially in Nigeria, the ability to create jobs to support the ongoing efforts of the Federal Government of Nigeria has become a significant priority as several financial interventions such as the Anchors Borrowers Programme, TraderMoni, Survival fund, AGSMEIS initiative, the creative industry fund, etc. seeks to drive economic development by directly impacting SMEs in order to create jobs. A question of whether the interventions provided has been properly utilized has also been a major concern to the Central Bank of Nigeria as there has been a high level of defaulting in the ability of these SMEs to make repayment for the loans as well as a discovery of misappropriation of funds. The challenges SMEs face are hinged on different factors and access to finance is one of them, however, without fixing some other challenges that are cardinal to the success of a business, access to funding would make no difference in the operations of such businesses. Some of the key factors that hinder the growth of SMEs aside from access to finance are: 1. Lack of Good Financial Records One of the reasons for the failure of SMEs is the lack of proper financial records. Inability to understand whether a business is making a profit or running at a loss is an assumption that owners of SMEs indulge in, thinking that as long as there is cash flow, the business can survive. While cash flow ensures that a business keeps running, survival does not in any way equate to growth as growth comes from profitability.  In order to expand, offer additional products or services, or hire extra hands you need your business to be profitable. Keeping financial records does not have to be rigorous. It simply has to be what forms the cost of running the business (expenditure) and what are the sources of revenue (income). Income has to be higher than expenditure in order to be profitable in business while still serving the client with quality value. There are several tools in place to ease bookkeeping e.g. Quickbooks and Sage 50. These tools can help managers without accounting background track their finances. 2. Lack of Standard Operating Procedures (SOP) Due to the lack of jobs for the teeming population, entrepreneurship becomes the best chance for most recent graduates and those in the informal sector, therefore leading to the emergence of accidental entrepreneurs. These sets of entrepreneurs lack the basic skills to compete globally with their counterparts as there are many gaps such as lack of adequate training to establish and manage a business. They do not also have a Standard Operating Procedure for their businesses. Standard Operating Procedures are a set of instructions that help to create structure on how a business is operated by the team, this helps to create cohesion and organization in the day-to-day activities of the business. SMEs usually run on impulse either due to ignorance or inability to hire an expert to create an SOP, leading to haphazardly running the organization in a fire-brigade approach, making deadlines almost impossible to reach and satisfying customers becomes a mirage. 3. Inability to Leverage Social Capital Social capital refers to the ability to leverage key relationships with different stakeholders that are key to a business. This form of capital can either be a relationship with the supplier of raw materials required for production, to support the receipt of input at a reasonable price or provision of the materials on credit. Relationships with family, friends, associates, and belonging to circles of social clubs can be the beginning of securing customers whose patronage would help secure capital for takeoff. 4. Inability To Create Visibility Online Creating social media handles on Facebook, Twitter, Instagram, LinkedIn, and other channels as well as having a website are necessary for a business to become visible to its target market. SMEs are limited in customer acquisition as their dependence is only on customers that can access their physical location. Being able to gain visibility to markets outside your environment of operation will give your business a competitive edge and also ensure you gain immense visibility online, therefore, increasing your overall efforts in acquiring customers and continuous cash flow. When these factors are properly tailored to support the growth of a business, having access to capital might not necessarily be a major challenge as reported by SMEs as a buffer of opportunity to benefit from the market has already been created as a result of putting the following constants in place.

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What You Should Know about VAT

Gone are the days when small and medium-sized scale business owners will say forget Value Added Tax (VAT). It is for big companies. If you continue to operate your business with that mindset, both the amount for VAT and penalties will keep piling up.  VAT is a tax that is added to the price of goods or services. It is charged at a rate of 7.5 percent. The current battle by some State governments to collect VAT in their various states instead of the Federal Government is a great concern for every business owner. Every business owner is by law a tax agent to the Government. It means that officially your business is meant to file VAT to the Federal Inland Revenue Service (FIRS) on or before the 21st of every month. Who pays VAT? VAT is paid by users of the paid goods and services. Every business that makes sales of products or services either at a stretch or cumulatively the sum of twenty-five million nairas (N25,000,000) or more in a year is liable to pay VAT. Considering this new development, the governments will employ all kinds of law enforcement, including touts, to collect more VAT. This will put more pressure on business owners and their cashflows. This law enforcement when they visit you as VAT defaulter, you will have to settle them, and still pay the VAT you owe including the penalty. What a loss! Put your house (business) in order by doing the following; 1. Separate your personal finance from business finance by simply placing yourself as a business owner on salary. If your business cannot pay salary then wages. 2. Stop using your company account to assist people who have relations overseas just because there is a promise of extra cash. You cannot prove is not for business afterward. Then you will be forced to pay VAT out of it. 3. Start keeping proper records of all your business transactions. 4.  If in the last three (3) or six (6) months you have not made sales or purchases worth six a million (N6,000,000), do not charge Value Added Tax anymore to your customers this year. The reason is that you may not be making up to twenty-five million Naira (N25,000,000). 5.  Even though you do not charge Value Added Tax you are supposed to be filing VAT to either FIRS or State Board of Internal Revenue depending on the state of residence. Presently, Rivers and Lagos states are the leading states in Value Added Tax collection. Hello entrepreneur, you cannot afford as a business owner in this present economy in Nigeria not to file Value Added Tax. The need and demand for money by the government at all levels have never been like this. This will push the government to take measures you may consider “not business-friendly”.   Read Also: Here’s Whats New on Tax Identification Number

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