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Financial Literacy

6 Key Areas Technology Can Help Nigerian SME’s Reduce Cost

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Drone delivering a package

18 months ago, in June 2015, whilst the rest of the country was still caught up in the euphoria of a newly elected government, we published an article on how small businesses in Nigeria could leverage the technology driving the ” On Demand Economy “ to either start a private enterprise or improve their existing businesses.

The underlying themes of the previous article were as follows

  • Do NOT wait for government’s help before starting your private business
  • Start earning your own income, ideally in foreign currency by taking advantage of the opportunities presented by the global village
  • Persistent and continuous advances in technology means that it should no longer cost small businesses an arm and a leg to startup and operate successfully.

Adopting these themes, leaves CEOs with more time to execute on their business plans. Interestingly, a recent Wall Street Journal article “growth in tiny businesses” provides further reading for those so inclined.

In keeping with our theme of “Technology as an enabler for small businesses” we take a look at 6 major costs incurred by Nigerian SMEs.

Specifically, how current and emerging technologies for 2017 can facilitate operational efficiency and cost optimization for Nigerian SMEs.

(1) Staffing Costs:

A major component of any SME’s expenditure is labour costs. This includes staffing costs for technical (core) staff, as well as, support (non-core) staff.

At this stage, everyone should be fairly familiar with the benefits of outsourcing. For small businesses, the ability to outsource non-core functions remains key. Functions such as secretarial, accounting, bookkeeping, data entry, payroll staff remain prime areas for outsourcing to a virtual assistant.

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However, a more exciting and emerging trend is the use of robotics in delivering outsourced services.  Specifically, repetitive tasks which are mundane and of limited value are simply automated and delegated to intelligent computers. (you have probably heard of AI….but that is a much broader topic)

The increasing integration of robotics in the workplace is anticipated to yield significant benefits to SMEs such as dramatic reduction in labour costs, increased precision from robotics will help ensure consistency of outcome, furthermore SMEs can also enjoy labor flexibility which robotics offers (i.e. with robotics there are no unions, no strikes and no demand for increased wages etc).

For SMEs looking to reduce labour costs, a lot of thought should be given to which staff are core to your business’ operation vs. staff performing non-core mundane tasks which could be outsourced to reduce labour costs.

(2) Communication costs:

In recent years, sole dependency on fixed landline telephones continues to dissipate. With the advent of VOIP services, we have seen an exponential growth in the availability of applications and equipment with technology to make and receive audio/video calls over the internet. Furthermore, the integration of VOIP technology within social media applications (Facebook calls, Whatsapp calls etc) means VOIP as a medium of communication now almost ubiquitous.

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In addition to VOIP for audio calls, applications now exist to facilitate email/written correspondence for businesses (unsurprisingly, Gmail makes the list). Video calling as a service is becoming as prevalent as audio calling. This Video calling functionality means face-to-face meetings no longer have to be in-person. Periscope (2015) Facebook Live (2016), Whatsapp Video calls (2016), were all launched in the past 24 months. This is in addition to traditional providers of meeting services such as GoTo meeting.

This increased use of apps for business communication, is driving an emerging trend called BYOD (Bring Your Own Device) where employees bring their privately owned compatible devices to work and have the appropriate communication applications installed.

The rapid decline in data costs (i.e. data usage, data storage and data transfer) means that there are more technological advances to come.

Imagine that in 1980, 1GB of data storage cost was over $400,000. This same 1GB can now be stored for less than $0.10. Think back to the days when it was novel to see a 1GigaByte hard disk, now 1 TeraByte hard disks are easily available.

What is my point?

In summary, for Nigerian SMEs, if you are still incurring significant amount of expenses on fixed line telephones, or paying huge amounts for employee handsets (such as blackberry, pagers etc) then you really need to take a strong look at the opportunity costs of that cash outlay on unnecessary communication expenses.

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SMEs, startups and aspiring entrepreneurs no longer need to experience long waits to have your fixed landline installed or face exorbitant costs simply to communicate with staff or customers.

Additionally, to facilitate face-to-face meetings, SMEs no longer need to incur significant cash outlays on flight tickets to provide your clients with more frequent product updates. Please note that this doesn’t mean SMEs don’t need to undertake business trips, it just means the trips need not be as frequent due to the alternatives now available for Audio, Video, Written communication.

(3) Materials Costs:

As previously mentioned, robotics and Artificial Intelligence (AI) can help reduce staff costs, whilst creating operational efficiency. These benefits also apply to costs of direct materials.  Specifically, the ability to leverage the increased precision which robotics offers to reduce production wastage, is a no brainer.

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Furthermore, increased use of robotics can help drive just in time (JIT) production methods with associated benefits on operating costs and margins.

In addition to robotics, an emerging technology of interest is 3D printing. What has 3D printing got to do with Nigerian SMEs?  Let’s provide some context.

Currently when Nigerian SME manufacturers need a new batch of production parts, they typically expect to go through the following steps,

1) Firstly the SME has to identify the parts required,

2) Then figure out the exact dimensions required,

3) Then establish which supplier carries the desired parts in its inventory,

4) Then place an order for those parts

5) Then deal with all the logistical hassle of importing and clearing (via Nigerian customs)

6) Then after clearing, the SME needs to transport the goods to the warehouse (via Nigerian Roads and in contact with the various agencies plying our roads)

To avoid the hassle of repeating steps 1 to 5 above, SMEs sometimes order more production parts than immediately required (i.e. SMEs occasionally order production parts “just in case”). This means incurring storage costs, as well as, opportunity costs for cash outlay.

Now imagine if after all that, the parts ordered arrive late and/or neither function as expected nor is fit for purpose? God bless

The deployment of 3D printing largely eliminates all that logistical nightmare and dramatically reduces cost inefficiencies.

From a small business perspective, the application of 3D printing is limitless.

  • Think SME Beverage companies who need to order empty bottles for their products,
  • Food sellers who need to order packaging for their products, and
  • Assembly companies who need to import production parts etc.

Bottle production, Food packaging, assembly parts molding can all potentially be delivered using 3D printers. Depending on business requirements, costs for 3D printers range from N150,000 up, although the HP Jet Fusion 3D Printer is amazing.

(4) Entertainment Subscriptions:

This is specifically targeted at those businesses (Hotels, Restaurants, Clubs etc) who have to keep clients entertained thus have to subscribe to TV, Cable, Satellite Dish, Internet etc.

We previously mentioned how the persistent and rapid decline in data costs provides opportunities to address Communication costs for SMEs.

Notably, the emerging trend of on-demand entertainment packages such as Netflix, Sling TV, Amazon, HBO, YouTube Roku, Hulu, Sky etc) is also driven by trend in data costs.

Arguably, there are very few global entertainment networks who do not offer catchup TV programs for users own time and convenience. Typically, these on-demand services are available at a fraction of the costs for traditional full-service package.

Therefore, unless you have an insatiable desire for Live TV broadcasts, it will be worth exploring how to leverage on-demand subscriptions to lower your business’ entertainment subscription costs.

As an example, DSTV’s popular package will set an SME back N63,100 (i.e. N19,900 for setup and N43,200 in subscription based on N3,600 per month). However, web streaming from You Tube is free. If you really want to get more streaming services, you can always get the Roku or Amazon Fire Stick.

NB: Even for Live TV sporting broadcasts, Twitter and Facebook plan to offer streaming

(5) Payments

For Nigerian businesses who have international partners, one can easily appreciate the level of frustration experienced in recent times with seamlessly making payments overseas (courtesy of the rules and restrictions being deployed by the CBN and FG).

In addition, there are also exorbitant costs of making those transfers at Nigerian banks. Some banks charge up to N105 per transfer (phew!!).

An emerging trend in the payments industry is the use of digital coins to facilitate settlement.  There are various digital coins in circulation but the most popular and widely accepted is Bitcoin.

Note that the popularity of Bitcoin is transient at this stage, pending further developments by central banks.

The key is to leveraging digital coins for payments is to determine what digital coin your international partner/service provider is willing to accept.  There are several lists of merchants accepting Bitcoins globally. So, this is somewhat easy to research.

Once you have established what digital coins your trading partners accept, feel free to setup your digital wallet and purchase the required amounts for your transaction.

From your digital wallet, you can either pay your supplier or exchange the coins for USD.

There are cons to holding digital coins as a financial asset. However, the benefits of using digital coins include timely payments for goods and services (subject to participating merchants), as well as, lower costs of transfers.

Yep that’s right, in some cases there is NO transfer cost when paying someone using a digital currency.

(6) Energy Costs:

How can Nigerian SMEs take advantage of all these opportunities being provided by technology when power generation capabilities remain only a fraction of the nation’s energy requirements?

This brings us to one of the more exciting emerging trends in technology. Specifically, the emerging trend towards decentralized power generation and consumption.

For Nigerian SMEs, this means pivoting towards renewable energy and/or Independent Power Plants (IPPs).

With regards to renewable energy (specifically SOLAR energy),

Unit costs of solar energy across the world continues to decline rapidly from $77 in 1970s to less than $0.50 (50 cents) in 2016

Additionally, PV cells are becoming much more efficient (i.e. modern smaller sized PV cells can generate similar or more power than older versions of PV cells. Thus, less space required to install powerful solar energy equipment.

An analogy for this development would be the residential satellite dishes which progressed from the ultra large satellite dishes of yesteryear mounted in spacious gardens compared to satellite dishes of today.

Bloomberg New Energy Finance (BNEF) initiative recently announced a major milestone  The increasing commercial viability of alternative energy means advanced countries can set aggressive targets…..UK (15%), Germany (18%), whilst the Asian majors (China and India) can confidently commit to a global initiative COP21

At the Corporate level, GOOGLE recently committed to offsetting 100% of its fossil fuel consumption with alternative energy.

In Africa, we see countries such as Morocco committing to large-scale deployment of land to generate solar energy (target for NOOR is for 580 Mega Watts annually once completed).

All this means that the per unit cost of solar energy is forecast to continue to decline.

In Nigeria, the use of inverters and batteries are now more prevalent in our major cities, thus more businesses are rapidly becoming self-sufficient in generating energy for their basic operations.

The benefit of this emerging trend in renewable energy is clearly that businesses, by installing solar panels and batteries, can continue to operate with less dependence on erratic sources of power supply (GENCOs/DISCOs), as well as, interruptions caused by scarcity of fossil fuels (PMS & Diesel).

In conclusion, for each of the major costs incurred by Nigerian SMEs, recent advances in technology continue to provide innovative CEOs with opportunities to improve their business’ operations, whilst reducing costs and enhancing profit margins.

The greatest thing about these opportunities is that they are devoid of any need to ask government for help.

Good luck, let us know of other areas where you feel advances in technology has helped reduce business costs.

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform.To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

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Financial Literacy

How to invest for retirement

Planning for retirement means planning to reduce obligation in the future by investing today.

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How not to worry about money in retirement

“If you plan to retire in five years what should you be doing today?” That’s a question I got last week, and talking with the client, a lot came up which I have decided to share.

First off, What is retirement?

Nigeria’s public service has an official retirement age of 60 or thirty-five years of unbroken active working service, but in financial planning, retirement is a financial, not a chronological event. Retirement can occur when your passive income can meet your non-discretionary expenses.

You start to plan for retirement the day you start to earn an income. Your retirement plan will centre on how to generate passive income and reduce expenses. In Financial Planning, Four distinct stages are usually described in a so-called Lifecycle Chart. These are the Accumulation, Consolidation, Spending, and Gifting stages. Chart 1. Financial LifeCycle seeks to segment investing priorities, recommended asset allocation, and risk profile in a chronological timeline as the person gets older. I will take each of these stages and explain how they are linked to your retirement plan.

READ: How to choose the right Pension Fund Administrator (PFA)

Chart: Financial Life Cycle

Early years: Use Your Time and Make Money, (Accumulate)

The first stage is called the Accumulation stage. Imagine a 22-year-old who has just graduated and is a management trainee. He typically has a low credit score and assets and income are also substantially lower. What he has in abundance is time. So it’s important to deploy his time in the best way to make money. Hence in the accumulate stage, the goal is to generate cash flow either from a job, multiple jobs, working longer hours, saving, cutting unnecessary expenses, etc.

The key measure in the accumulation stage is the Savings Rate which is essentially how much of income earned or generated has not been spent. On average, the participants in the accumulation stage have fewer dependents and maintenance needs which should theoretically make it easier to save.

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READ: This thread exposed everything that’s wrong with Nigeria’s VAT

Mid Years Use Your Money To Buy Assets (Consolidation)

In the consolidation stage the focus shifts from saving to investing. At this stage, the income earned and credit scores have improved. This is when the talk of buying a home or starting a business takes concrete shape because, at this stage, those dreams can be funded. Hence capacity to take on debt is improved, and debt is used to invest in assets like a home. Remember debt is simply front-loaded consumption, which means we are taking our future income to invest today, intending to repay with future income generated from today investment.

The key measure in the consolidation stage is the Rate of Return which is essentially how much has been generated from the investments made.

READ: How to choose the right Pension Fund Administrator (PFA)

Spending & Gifting Phase; Use Your Assets To Generate Cash Flow and Time (Spending and Gifting)

Why is it called the spending phase? Because that’s what the individual is doing, spending down accumulated investments. The spending will include buying annuities or perhaps relocating to another city, your dependant’s college needs, etc. At this stage, typically very few are still earning “new” income but are rather spending from the return of prior investments.

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The key measure in the spending stage is the Withdrawal Rate which is essentially how much of investment can be withdrawn as cash annually to ensure we do not outlive our investments.

READ: How interest rates impact your wallet

Retirement is All About Passive Income

Passive income, which is the income we are making from investing from the accumulation and consolidation stage is now sufficient to generate income and reduce expenses to meet our expenses in the spending/gifting stage.

To give an example, assume we took a mortgage to buy a house in the Consolidation Stage, in the Spending stage, we pay no rent, thus we save cash, which reduces our Non-Discretionary Expenses. In essence, retirement is planning to eliminate your future expenses to the point where you need less income when you retire.

What Should You Invest In Before Retirement Or In Retirement?

Our objective is simple, Income. In retirement, we invest solely to make income to meet our spending needs, Risk profile is also very low because there are fewer recovery options if your investments sink.

The retirement portfolio is an income-generating portfolio that will be overweight in fixed income products. First, determine what the risk-free rate is. In Nigeria, we can take the yield on a ten-year FGN bond as a guide, this means we can have a target of 10% as our huddle rate for the long term. Thus I will recommend an 80/20 portfolio with 80% going to Fixed Income consisting of long term bonds, REITs, and other top-grade commercial paper.

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However what happens if we lock in our funds for 10 years at 10% and rates jump to 20%, meaning a loss to our portfolio.  To avoid this risk we can create a bond ladder, where we break down the bulk sum and duration of our total bond investment outlay. Let us assume we have N10m in cash to invest, instead of one single lot investment of N10m, we split into 5 equal investments of N2m and place for 6, 7, 8, 9, and ten-year maturities. This means by the 5th year the first N2m will mature, if rates are higher, reinvest, if rates have fallen then reevaluate.

READ: 10 Side gigs to venture into while working a full-time job

What about Equities

Yes, equities also pay a dividend. In buying equities, we must ensure we are only buying stocks that pay a dividend above our huddle rate of 10% which is the 10-year FGN bond rate. Which Nigerian stock meet that huddle rate?

  • Lasaco
  • Zenith
  • GT bank
  • United cap

In closing, let us summarize. Retirement is not chronological age. The event occurs when our passive income pays our bills. Planning for retirement means planning to reduce obligation in the future by investing today. Investing in retirement is income-based with a huddle.

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Financial Literacy

Steps to take to bag international scholarships

Here are the steps you should take if interested in pursuing international scholarships.

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United Kingdom opens window of job opportunities for international students

Studying abroad gives you exposure among many other things, and that is precisely why many Nigerians have been looking for ways to study abroad. However, not everybody is privileged with the resources to study overseas and this is where the international scholarship option comes in.

If you are interested in studying abroad and don’t have enough funds, you should consider applying for international scholarships. This article lists the steps you can take to bag international scholarships but before delving into that, here are some types of scholarships available to you as an international student:

  • Location-based scholarships
  • Course or program-based scholarships
  • Sports-related scholarships
  • Research-based scholarships
  • University-funded scholarships
  • Organization-funded scholarships
  • Government-funded scholarships

Having discovered the types of international scholarships available to you, here are the steps you should take to bag any of these international scholarships.

Research: Research is vital if you don’t want to miss out on good opportunities or make mistakes during your application. Research scholarship opportunities available in your prospective college or location and be on the lookout for hidden scholarships.

Check your eligibility: Having done thorough research and discovered the available scholarship opportunities, check to see if you are eligible for them. Many international scholarships have their criteria and requirement, so you should confirm that you are the right fit first.

Get the required documents: After confirming your eligibility, you should get the necessary documents. If the scholarship requires you to write an exam, prepare for the exam, write a good statement of purpose and prepare all other documents.

Start your admission process: Some international scholarships require that you start your admission process and probably get the admission before starting your scholarship application.

Contact past scholarship winners: You might want to contact the previous scholarship winners to know what they did right and how you can learn from them.

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Apply for the available scholarships: The last step is to apply to every available scholarship.

The best way to get funds for your undergraduate, postgraduate, or PhD pursuits abroad is by applying for international scholarships. If you do thorough research, you can find fully funded scholarships that won’t require you to pay any amount. One of the essential steps to getting an international scholarship as a Nigerian is staying abreast of current information and this will require you to network with others.

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