Back in school one of my favorite topics was the M&M theory. The theorem states that, “under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed”. What this simply means is that one common factor that differentiates one successful business from another is their individual ability to mitigate and exploit the effect of taxes and market information in their business activity.
Several factors affect the survival of a business no matter how big or small. However, some factors are within the control of the managers of the business and the other outside the control of the business. Whilst the M&M theorem basically focuses on the factors that are not within your control, other factors within your control also affect the survival of your business. In my opinion, factors within your control are by far the quickest ways to kill a business. Let us explore some of them;
Not separating the business from the owner/managers
This is simply the way your business is being run. Most small businesses in Nigeria are owned by one person and as a result they are run incoherently without any formal structure. Most times they have no form of separating personal cash from cash meant for the day to day running of their business. It is either they are drawing from the business or lending to it without any record to show who is owing who. Sometimes, they use the cash generated from one business to fund the startup of another ending up killing the original business.
A cycle that continues so long as the owners are making ends meet. By running the business as a one man show, employees (if any) are hardly carried along and merely see the business as a means to survive rather that as a venture that they can help grow. Businesses run this way (in no time) end up falling by the way side or simply just get sold. The business dies leaving the owner to start another venture.
[READ ALSO: Things you should know before starting a business]
There was this manufacturing company that announced a 20% increase in revenue leading to a 12% increase in earning per share for shareholders. The company will go on to declare a dividend helping raise shareholder’s confidence. Unfortunately, the company failed to tell its uninformed shareholders they had to borrow to pay dividends despite making profits. Liquidity is the lifeline of any business. Without cash your business will simply fail and it doesn’t matter how much assets you have.
Most small businesses often believe in acquiring many assets without stashing of enough cash. I recognize that by investing in assets business owners can leverage on it to borrow money or sell it in times of need. But what if there is an immediate need to source money at a time when lending is tight and asset prices have depreciated? This was the problem Lehman Brothers had when they collapsed in 2008.
Whilst they had so much money tied up in assets they could not sell it to raise enough capital to pay their creditors thus leading them to bankruptcy. As a small business, you must always keep adequate cash reserve. One way to know how much cash you need is to do a cash flow analysis of your previous months transactions. If you spend N2million monthly on running your business then it is advisable to always have N4million as cash at the end of every month.
Too much debt
As mention above without cash no business can survive as such business without cash mostly result to borrowing. Small Business loans mostly come in the form of overdrafts and are used to fund running cost in the hope that expected revenues will repay the debt. However, in some instances some divert the money into other uses that add no value to the growth of the business.
[Read Also: I love to look at Revenue Reserves and This is Why]
In fact some who utilize loans for the right purpose end up finding it hard to pay back not to talk of those who use it for other unproductive means. A company with too much debt will someday have to repay the debt; and without finding other sources of repaying the debt the banks will have no option but to liquidate the company.
Too Much Creditors
“No credit today come tomorrow” is a common sign post you find at the door of most small businesses. Business do need to grant their customers some credit sometimes. It is a common business metric provided it is properly measured and for the right business model. Some businesses are best suited for credit whilst some aren’t at all. Manufacturing businesses and wholesale ones are more predisposed towards granting credit. However retailers and service providers should try as much as possible to avoid granting credit or limit the the amount of credit given to the minimum. For example, a reseller of recharge card does not expect to sell on credit when MTN hardly does. That s why when you owe a GSM provider they cut your line.
Square Peg in the round Hole
Employees are one of the most important assets of a business. The more skilled and qualified your emloyees are in their job the more likelihood you are expected to succeed. Small businesses should endeavor to recruit the best possible employees they can find to handle job responsibility. No point employing out of pity when you have the financial resources to employ quality. In addition to that, your employees must be frequently trained to ensure that they are ready to compete in a dynamic and competitive environment. Most business owners erroneously see this as a waste of money. Employees have been known to single handedly bring down companies because the managers placed enormous responsibility on them without proper checks and balances. If you employ a staff without proper background checks to handle cash or critical aspects of the business then you stand the risk of loosing your cash and maybe the business itself.
A common feature of shopping malls in Nigeria are the rate at which one shop replaces another. You go to a mall today only to come back a few months later and the shop is no longer there. Some attribute this to their inability to sell products as most visitors to the malls often end up window shopping. Another major reason is the amount of Rent these shops pay. Businesses that incur high fixed cost are more likely to fail quicker than those with higher variable cost and lower fixed cost. Imagine having a shop at a mall where you have to pay a yearly rent of N12million. That means your business must be able to generate cash revenues of N12million annually just to at least be able to pay rent. That can be onerous considering that you still have to spend money on marketing, salaries, purchase of goods and services, taxes etc.
Overestimating the Market
Most of us go into businesses with or without a proper business plan. However, having a business plan does not guarantee that a business will be a success. A major reason for this is making very optimistic assumptions about the market without putting a backup plan should our estimates fail. For example, we may believe that by sighting a business at a particular location may seem like a good idea because of the huge population residing in the area. However, their purchasing power and their immediate need for the product is also a crucial factor. Sometimes too we over estimate the demand for a product because of the lack of it. There is hardly a reprieve for businesses that overestimate the market. They fail quickly.
Recently a very popular food company had a huge problem at their hand. Someone had spread a rumor that their food was had a chemical that had killed some people. They quickly went on a massive publicity spree to debunk the claim and solicited the heap of regulators such as NAFDAC to help debunk the claim. They knew that negative publicity such as this could in one day wipe out all the brand assets they have toiled to build and nurture over the years.
7 common money mistakes I made and why you should avoid them
Don’t plan your wedding with the hope that your uncle will foot the bill. It is setting yourself up for frustration. Uncle also has his money issues that you have no clue about.
On Sunday, March 17th, 2020, Nairametrics Founder, Ugodre Obi-Chukwu, tweeted a question that has over time garnered more than seven hundred interesting responses. His question was about debt and it was straight to the point —”What was the most amount you lent out to someone and never got paid back?”
What’s the most amount you lent out to someone and never got paid back?
Mine is N550k and it’s still paining me till today.
— Ugodre (@ugodre) May 17, 2020
As you can expect with this type of question, the responses were varied and highly personal. The Twitter thread also proved one thing, and that is the fact that banks are not alone when it comes to bad debts. One of those whose responses stood out for this author is Gabriel Omin, a personal finance enthusiast. Interestingly, Mr Omin had earlier written extensively about the 7 money mistakes he made in the past, and lending is atop his list. See below.
Never Ever Lend Money Kept In Your Custody.
There is a reason you were chosen to keep the money. People do not joke with their money and so they carefully choose who keeps corporate funds. Even thieves chose trusted people to keep their money.
When you betray the trust of people for whatsoever reason, you’ve soiled your name. You will lose social capital, which is a very important capital (this is one of those, not everything that counts that can be counted). That is very hard to undo. Whatsoever happened, it’ll be hard for people to forget. My dad will not touch the original money that is given to him to keep. If you numbered your money, you will get it back the same way. Basically, you will get the same notes you gave him to keep except he took the money to the bank.
I learned this the hard way. A friend of a friend came with a need. He told me he had funds in the bank but it did not clear and the next day was a public holiday (this was pre-online banking). I loaned him money that someone gave me to keep. The person who gave me the money to keep, trusted me to the extent that he refused to sign a contract with me because he trusted me. I was supposed to get the money on the next working day, from the friend of a friend. Till today the next working day nefa reach. I had to go to the guy who gave me the money to keep for him, spoke a lot of English and paid back though I missed the day we earlier agreed. It was sad but I learned the hard way.
Avoid Impulse & Unplanned Expenses.
No budget, no spend. Spending without a budget is misappropriation. It doesn’t apply only to politicians. Have a budget & stay on it. This is the epitome of discipline. People will say what they want to say but instilling financial discipline is more important. A budget creates boundaries. Without a budget, you are on the speed lane to debt and debt…s/he is cruel. Plan plan plan. There might be surprises but a plan keeps you in order. It helps you know where you have detoured. You must not buy every AsoEbi. ATM cards are sweet to swipe but hard on the balance.
One of the ways to avoid impulse buying is to hold cash. Yes. It sounds not- so-tech in a tech age but believes me it works. When the cash is finished, it is finished. Sitting down in one place also helps. Yes o. The more the outing, the more the expense. I can feel the envy I am generating with this but na so e bi.
The Money Will Come.
You are old enough now to know that the money will not always come. Things happen. Have a buffer for emergencies. The difference between politicians & business people is that politicians do not understand why the money should not come. Business people work for money. They know that you have to make it happen. Stop planning your expense based on the generosity of strangers.
Spending Based On Other People’s Purse.
Don’t plan your wedding with the hope that your uncle will foot the bill. It is setting yourself up for frustration. Uncle also has his money issues that you have no clue about. Don’t plan to fly business class with the hope that someone else will pay. You are not on welfare. Even if you are on welfare, please bring something to the table. That something is humility.
Responsible people spend within their means. They may not have Rolexes or iPhones but they hardly ask for help on predictable things like house rent, school fees, etc. It takes 9 months to have a baby. It is not an emergency; plan for it. I take God beg you; plan.
Your kids should be in schools that you can afford. People have come to me for fees of school that my kids cannot even attend. I once headed a scholarship board and we set our requirements from day one. But parents kept coming for help in schools that they cannot afford. I mean households that both parents were not earning any income. You see what I mean by the fact that you have to contribute humility when you come to the welfare board?
Don’t buy with the hope that someone else will pick the bill. Try and agree upfront for a joint transaction. For the fact that someone paid upfront might mean that s/he expects repayment. Don’t think s/he is wicked when repayment is expected and asked for. In joint transactions, always think of going Dutch except you are advised otherwise. Err on the side of caution.
Spending Money Before It Gets To You.
Things happen. Until money enters your account, don’t go & pick something with the hope that you will pay when you get the money. That habit will lead you into the red. How about if that money does not come at the end of the day? I try not to make promises to people based on expected money. I see people start piling up debt just because they got a new job. It will distort your balance sheet if you start that way. It never ends well.
Money Sent Me On Errand.
I have seen people who were given a raise, upgrade their lifestyle in a heartbeat. Fly business class by the next day. Buy an expensive toy they never planned for. This is what happens to lottery winners. They pursue the appearance of wealth. The appearance of wealth is demonstrated when you get those things that make it look like you’ve arrived. It is the reason people take pictures sitting on cars; same reason musicians record videos in mansions and nice cars and private jets. Gang stars wear fur coats. Same when people buy TV/stereo set/gadgets with their first salary. Always allow the money to cool down. Take out time to plan what to do afterward. I have a one month rule for windfalls. They stay in the account until such a time that I have decided the way forward.
Depending on the Generosity of Strangers.
This is living life with the hope that somehow someone else will show up in the nick of time to pick your bills. It leads to living in debt and hoping that those you are indebted to will forget the money. These people can come to you with their family to thank you for the debt forgiveness you have rendered them. Meanwhile, you have said nothing of such. They always convert their debt into forgiven loans by themselves without your consent. They are experts at this. They quarrel and get contentious if you do not forgive. Money problems abound.
So, next time you think of doing any of these, have a rethink.
A New Wave: Where to Invest in H2 2020
Some of the industries that are expected to succeed given the changing times are not your usual kinds of investments.
There are two kinds of people in the world: The ‘glass-half-empty’ kind, and the ‘glass-half-full’ people. Where some see problems, others see the opportunities – same glass, but different perspectives. 2020 might have left very little hope to hang on to, but the world is still in motion.
Amidst the chaos, many have found their diamonds in the rubble – and many more will. These people, however, will be those who are willing to adapt to the changing times by repositioning themselves to leverage the opportunities that arise.
The Covid-19 pandemic has proven to be a holistic challenge, bringing to the fore a myriad of issues. It has caused a dent in the revenue/ disposable income of many businesses and individuals alike, shaken the very balance of the economy with many countries heading for unprecedented recessions, and left everyone with so much uncertainty.
Yet, we are at the cusp of a new dawn. Processes are changing, new industries are emerging, and money is changing hands. Flexibility, automation, and sustainability are just some of the words that will make all the difference in the world of business.
Dr. Ola Orekunrin Brown, the founder of Flying Doctors – a healthcare investment company – had, at the Quarterly Economic Outlook Webinar hosted by Nairametrics, offered insights into some of the industries that are expected to succeed given the changing times, and they have been outlined below. But be warned, a lot of them are not your usual kinds of investments.
Investment opportunities to leverage in H2 2020
One of the many trends that emerged in recent times, as a result of the Covid-19 pandemic induced lockdown in many parts of the world, is a huge dependence on internet technology and digital media. Everybody went indoors – and online. The entertainment sector found its home on social media through Instagram Live parties, Tik Tok, and the Houseparty App.
Companies went online as well, leveraging digital technology like Zoom, Microsoft Teams, and Slack. Even the lifestyle industry went online with online gym classes, yoga classes, and even karate classes. Not only have they provided much-needed solutions, they have also come with the additional benefit of convenience.
A good example of this is Eric Yuan, the founder of Zoom, who joined Forbes’ billionaires’ list for the first time as a result of the increased use of Zoom for work meetings. Apptopia, an App tracking firm, reveals that Zoom was downloaded 2.13 million times around the world on 23 March, the day the lockdown was announced in the UK– up from 56,000 a day and two months earlier.
Another feature of the digital economy lies in the education sector. With schools forcefully closed, classes have had to go online. Online courses, training workshops, and even full degrees will become more normal as those who work from home will see these online education courses as an opportunity to develop themselves with little effort.
Investments here will be even more fostered by access to international markets, thereby increasing the market size. ResearchAndMarkets predicts that the online education market is poised to grow by $247.46 billion during 2020-2024, progressing at a CAGR of 18% during the forecast period.
Institutions that are too big to fail
The stock market is expected to be even more volatile, given the overall unfavourable economic terrain and a high level of uncertainty – especially with all the talks of a recession coming. In H1 2020, the more favourable companies to invest in are those that have stood the test of time – the stocks that are too big to fail.
Many of these stocks have been in existence for decades and have been able to attain a level of stability as a result of their large market share and stable structures. You want financially strong companies and the reason is not far-fetched; the goal is to put your money behind the companies that are strong enough to withstand the storm to a good extent.
Another by-product of the Covid-19 induced lockdown is the increased need for internet services. Dr. Ola explains that the use of the internet as well as the move to work-from-home, are some of the megatrends of the times.
Good internet connectivity has proven to be the lifeblood that keeps digital entertainment trends, digital work trends, digital lifestyle trends, digital entertainment trends, and a huge chunk of the communication we have today. As a result of this, companies in the telecommunication industry have begun experiencing growth in revenue and earnings. Investments in this sector will most probably be worth your while.
Distribution & E-commerce
When the Okada ban took place, several motorcycle companies that were affected were forced to pivot from transporting people to moving items as full-scale delivery businesses. While many might have thought that a bad idea, the lockdown has undoubtedly contributed to the development of this industry.
The e-commerce industry is also expected to thrive with trade moving predominantly to the internet. Investments in distribution companies and e-commerce businesses are also expected to be worth your while.
One of the major hits of the pandemic is the Nigerian foreign exchange market which has now become highly volatile. The demand for the dollar far outweighs the available supply and this has forced importers and speculators alike to scramble for what is available in circulation.
Given the challenges with the FX market, international spending on foreign denominated expenses like tuition fees or international loans will come at an increased cost. To mitigate foreign exchange loss challenges, investments in USD denominated equities, and Eurobond funds will help you withstand the storm. While gains here could have you betting against the Naira, having foreign investments in your investment portfolio will come in handy.
The Agricultural industry is an expected gainer. One of the reasons for this is that local supply chains will expand, given the restrictions on the global supply chain as a result of the lockdown and the border closure. While this will also thrive, Dr. Ola Brown, explains that jobs will only be created in the short term.
This is because fewer hands will be required as productivity, better processes, and mechanization systems increase. An example of this is the new trend of robot herders in the United States. This is even more so as we compete with the rest of the world in production. Needless to say, Agriculture will always exist, given the need for food, as well as the rising global population.
Get the Nairametrics App
While the Covid-19 pandemic has a direct impact on the healthcare industry, the industry is a complex one. The first reason for this is that, with the healthcare infrastructure deficit in Nigeria, the government will need to invest in it to provide wide access.
With subsidies on healthcare, the free market in terms of investments might not be as lucrative with more people opting for government healthcare. However, given increased investments in the sector and the move to preventive health practices, the industry remains attractive.
For more detailed investment opportunities with specific stocks in the Nigerian Stock Market, sign up for the Nairametrics Stock Select Newsletter.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.