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Financial Literacy

10 Mistakes to avoid for Start-Ups

10 Mistakes to avoid for Start-Ups and business owners.
#Startup #Business

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Starting a business

Congratulations on starting your business. It feels good and exhilarating to form a vehicle with the potentials to live your dreams. However, where good things are bound to happen, bad things also have the potentials to creep in. So while gearing up for starting your journey, make sure you refrain from making these mistakes. They will definitely cost you dearly.

1. Not getting a lawyer

A lot of people believe lawyers are blood sucking parasites who are out to get all your money. Based on this, they find ways to avoid getting a lawyer when starting anything. This is a sign of bad decision making as a business owner. Having a lawyer is very essential to your business. He will be the guardian angel always leading you in the right part, giving you advice on virtually everything you should or shouldn’t do.  

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benefits of having a lawyer

A lawyer would be handy in advising on the suitable business structure, helping to draw up and reviewing agreements, keep track of all your lawful obligations and other pitfalls that may be lawful but not beneficial to you and of course for the appropriate fee. Believe it or not, having a lawyer at starting up is more cost effective than getting one later.

2. Not having the right business structure

In Nigeria, there are business structures as stipulated by law and understanding these structures will help in understanding the appropriate structure to suit your current needs. Legal business structures are determined whether you’re starting off as a sole proprietorship, partnership, private or public company limited by shares or guarantee, an unlimited company or a non-profit organization.

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BUSINESS STRUCTURES

It is possible to move to move from one form to another based on a few restrictions but understanding the particular one needed at the moment is very vital.

3. Not keeping records

Keeping records is definitely a no-brainer for every business owner. The importance of keeping records cannot be over emphasized as it helps not only as a source of reference but can be very handy should any legal issue arises. Apart from contentious legal matters, records can also be helpful when computing taxes. While paying taxes, your records would go a long way with determining allowable deductions.  

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Advantages of keeping records[Read Also: How to interview the person hiring you]

4. Absence of Formal Agreements between Partners

Love of money they say is the root of all evils. Nothing may separate a unit faster than misunderstanding when it comes to finances. To forestall every unforeseen disagreements and unwanted strife, it is always pertinent that as soon as ideas between two or more people becomes a going business concern, a formal agreement should be drawn up to determine the scope of the powers and liabilities of each of the partners.

partnership agreementAgreements of this nature will usually contain management formula, profit sharing mechanisms, mode of resolving disputes among partners and also criteria for admitting new partners or expelling a partner.

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5. Accepting Handshake Deals

You have finally found that investor that is about to give your business the much needed boost to announce your arrival in the business world and you are basing heaven and earth that has been promised to you on a handshake. You might have just played yourself. It is very uncommon to find people with a large heart who naturally want to help in the business world.

Investors and interestsMajority of deals in business are driven by personal interests and what stands to be gained. So when you find that investor you have been praying and fasting for, kindly ensure you draw out something on paper (if there is a pre-drawn agreement, ask a lawyer to review it for you), meet to hammer out the fine details, have it signed and then, you can have your handshake.

6. Not paying your taxes and other obligations

Give to Cesar what belongs to Cesar. Paying your taxes are very important. They should be calculated properly and paid promptly as it prevents you from having unforeseen problems from the law. You don’t want to come to your place of business on the first day of the week and find your premises sealed for lack of compliance. It also helps your firm profile.

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pay your taxes

Investors will be more confident in your business when they find out that you’re regulatory compliant. Also, getting lucrative deals nowadays have the prerequisite of having a tax clearance certificate of which you can’t get if you don’t pay your taxes. In addition, if your business is operating in a service industry that requires certain licenses and permits, make sure you obtain them.

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7. Absence of contractual obligations between you and your clients

You should be familiar with words like terms and conditions, warranties, disclaimers and return policies. These terms are important in regulating the relationship between you and your clients. Absence of having a contractual of service that creates obligations between you and your clients has untold repercussions. Clients can be very nasty at times and the moment they get away with something, they may tend to want to keep doing it, so when there is a pre-existing contract of service, clients bullying may be averted.

Terms and conditions, warrant, disclaimer[Read Also: Access Bank launches Womenpreneur Pitch-A-Ton 2019]

8. Not protecting your Intellectual Property

It is always a good idea to have your products tested before you put it out. Unfortunately, it’s a cruel world out here in the streets, and the moment your precious products you have entrusted to the wrong party gets copied or imitated, your sweat and hope of cashing in takes a dent. This can simply be averted by having potential investors or that innocent family member of friend sign a non-disclosure agreement before showing them your products.

what is intellectual property9. Not taking cognizance of employment laws

Absorbing new talents is always a big step when employing to grow your business. But before you do that, make sure you are fully abreast with regulations concerning employment in Nigeria or the country of your business. Issues like minimum wage, maternity leaves, pension contribution, firing an employee are very important and they can put you in a lot of trouble with the law.

employment regulations10. Getting a lawyer when it is too late

Lawyers are like cars. Whether luxury or regular, they provide essentially the same services. However, the differences are the level of comfort, speed and the certainty of getting to your destination in time. Failing to retain a lawyer as a business owner can be very fatal.

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If you wait till you have legal problems before you get a lawyer, chances are that you will be paying more legal fees than you would have paid had you retained a lawyer. This is simply because most problems that business owners are usually problems that could have been avoided had they sought legal advice before they embarked on such endeavours.[Read Also: Nigeria needs N36 trillion investment to achieve stable power supply]

Patricia

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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MSME

What SME’s need other than Intervention loans

Since access to finance is a key constraint to SME growth, funding it has become paramount.

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SME's, Here’s why your business needs a solid value proposition (PART 1)

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. According to the World Bank, they represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies and these numbers are significantly higher when informal SMEs are included. The World Bank predicts that “600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world.  

Since access to finance is a key constraint to SME growth, funding it has become paramount. This has birthed a myriad of programs ranging from incubators to accelerators both locally and internationally giving out loans, grants, and other resources to ensure that the sector is equipped to create jobs and stimulate the overall economy. There have also been federal grants and other forms of support given to SMEs. Since the outbreak of the Covid-19 pandemic, SMEs have been prioritized as recipients to loans and other stimulus packages. The CBN’s N50 billion Targeted Credit Facility (TCF) geared towards supporting SMEs and households whose economic activities have been disrupted by the COVID-19 pandemic, is just one of the different packages that have been put in place to cater specifically to it.  

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While there is data to back the impact SMEs have on our economy, it is true that even though small businesses help the economy, not all small businesses will contribute to the dream – or even survive past its early years.  According to The Better Africa report, by Weetracker, an African digital media company, the top 5 countries that experienced the highest shutdown rates among start-ups between 2010 and 2018 were Ethiopia at 75%, Rwanda at 75%, Ghana at 73.91%, Zimbabwe at 66.7%, and The Democratic Republic of the Congo (66.7%). Failure rate for start-ups in Nigeria averaged 61% over the same period. What this means is that if small business loans are being given to businesses at random in Nigeria, 61% of those businesses are bound to fail and the monies given, completely lost.  

The small business loans being offered by the CBN is a good step in the right direction. However, determining whether it ends up in the hands of the startups that are viable enough to scale and create the jobs or the larger percentage that will fail, depends to a large extent on how they are selectedIn disbursing the loans, there must be clear methods of choosing the recipients. CBN’s N50 billion Covid-19 intervention fund for SMEs in conjunction with NIRSAL Microfinance Bank, simply noted that it would appraise and conduct due diligence applications before sending them to the applications to the CBN for final approval, to CBN for review. The results will tell their story. 

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Why the economy needs more than loans 

The CBN giving out intervention loans is just one part of finding the solution – and this too does not say much about the amount in loans being given and their effect on the economy at large. If it’s too little to make any real difference, then it might only buy many of these businesses a few more months of dogged survival, after which all will be lost.  

The overall operating environment must be able to stimulate growth either through favourable tax incentives for specific industries, moratorium on other forms of loans, or just the provision of basic infrastructures like electricity and speedy internet services.  

READ ALSO: What Nigerian MSMEs must do to thrive in the new normal

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Another important thing is to ensure there is a ready market for businesses within the country. Even with the right federal loans, a business having no ready market will sink its funds into inefficient marketing. This ready market, however, has a lot to do with the ease of local production to ensure competitive pricing, further curtailing the proliferation of imported items, and more. 

In other words, economy will benefit even more from its overall development. The loans might help but, overall, there is unlikely to be sustainable exponential growth until the things that should be in place to expedite the development process exists. 

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Patricia
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MSME

How Nigerian SMEs can survive high mortality rate

SMEs are a very important economic catalyst in developing and industrialized countries.

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More than 40 SMEs in Lagos shut down due to economic crisis

In Nigeria where unemployment is a serious issue, the local businesses have a special position in the industrial sector because it has created employment and has been able to utilise labour. The local businesses, otherwise known as SMEs which means, Small And Medium Enterprise are everywhere, found on every street and corner as they surround us.

There is however no universal definition of SMEs that is widely accepted as it differs and varies from countries, but this is usually based on employment, assets or combination of the two. Institutions and organizations define SMEs in different ways depending on the purpose and the objective. Take for example, according to Organization for Economic Co-operation and Development OECD (2005) SMEs are considered to be independent firms that employ less than a given number of employees. However, SMEs were classified in terms of size, and financial assets.

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The Small and Medium Industries and Equity Investment Scheme (SMIEIs), defined SME as an enterprise with a 200 million naira maximum asset base, with the exclusion of land and working capital and with a workforce of not less than 10 employees and not more than 300 employees. Akabueze,(2002).

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The Third National Development plan of Nigeria (1975 – 1980) defined a small scale business as a manufacturing firm that employs less than ten people, or whose machinery and cost of equipment does not exceed N600,000
The Federal Government Small Scale Industry Development Plan of 1980 defined a small scale business in Nigeria as any manufacturing process or service industry, with a capital not exceeding N150, 000 in manufacturing and equipment alone.

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These definitions give a clearer explanation as to how the meaning of SMEs differs and varies. However, just to give you a clearer understanding of what local businesses or SMEs mean, they are independently owned organisations that require less capital and less workforce and less or no machinery. They are ideally suited to operate on a small scale to serve a local community and to provide profits to the business owners.

READ MORE: FG to disburse N97.3 billion to tech innovators, agric enterprises

Most enterprises in Nigeria, most of which are in the commercial sector are categorized as small businesses. The role of the small and medium enterprises towards the development of Nigeria is of great importance as it has contributed greatly to the country in terms of growth and development and also in providing employment opportunities.

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From seminars to workshop initiatives for SMEs both locally and internationally, a lot is being said about SMEs all over the World.

According to the Central Bank of Nigeria report (2003), SMEs are a very important economic catalyst in developing and industrialized countries.

According to the United Nations Industrial Development Organization (UNIDO), developing countries can conquer poverty and inequality by democratizing, deregulating, and liberalizing the integration of the global economy. Recent studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high-income countries also that SMEs and informal enterprises account for over 60% of GDP and over 70%of total employment in middle-income countries (OECD, 2004).

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READ ALSO: These Nigerian businesses are being affected by COVID-19

However, considering the term “small”, there’s a whole lot of enormous challenges that come with it. In Nigeria, the factors working against the development and growth of local businesses are quite numerous, some of which include:

1. The issue of funding is a major problem with SMEs in Nigeria. However, the problem is not how to source it but the accessibility to either short or long term loans.

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2. Lack of infrastructural facilities is a serious impediment to the performance of SMEs. The problem of inadequate infrastructural facilities includes electricity, good road network, availability of potable water, and solid waste management. These infrastructures are left to the business owners to provide themselves.

  1. Poor Management and Low Entrepreneurial Skill Base is a serious clog in the survival of small businesses as there is a lack of essential and required expertise in business which leads to wrong and costly decisions and mismanagement.
  2. Entrepreneurs often blame their failures on inadequate sales. However, the problem lies with poor marketing skills that could help promote their sales.
  3. Most entrepreneurs go into business without proper planning by taking a realistic view of what their strengths and weaknesses are, let alone giving careful consideration and analyzing the economic trends or business conditions in that particular sector of activity, which sometimes leads to mishandling when the business starts to expand.
  4. The root of most employee problems in Nigeria is poor personnel management. They put aside personnel matters till crises set in. Such crises usually pose serious threats to the firm’s survival if they are not promptly looked into.
  5. The harsh deteriorating macroeconomic environment in Nigeria has adversely affected the performance of small business enterprises and has posed as a major challenge to their survival and growth. Most small business enterprises are struggling with the problem of uncertainty caused by the unstabilized macroeconomic environment and policy shifts.

With all of this ongoings, some of the solutions preferred to ease these challenges include:

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1. The need for government, and non-governmental organizations to create Seminars and workshops initiatives and other forums, to establish a platform for the interaction of SMEs owners/managers with others which can help to improve on their management capabilities.

2. Government should also provide the necessary infrastructures in order to ease the burdens and thereby encourage and promote rural industrialization.

3. The SME owners/managers should strive to develop effective marketing strategies in order to boost business operations which will become profitable.

4. It is important for SMEs to develop good personnel management policies to avoid crises that could affect their business.

5. Local business owners should take to proper planning, realizing his strengths and weaknesses before diverting into any business to avoid mishandling.

6. Goverments should help create a macroeconomic environment that is stable as it will enable these local businesses to make reasonable forecasts on costs, turnover, and return on investment.

7. The government should help in making funds easily accessible to SME owners/managers, be it short or long term loans that could help to encourage them to execute their business plan.

8. SMEs operators should also develop their competences in managing and sustaining their businesses by constantly engaging in training, research and development.

 

Patricia
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Personal Finance

Emergency Fund: Can you raise N50,000 cash tomorrow?

Focus on building up your emergency funds before building a portfolio of assets.

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Emergency Fund

Can you raise N50,000 cash tomorrow? Yes cash, without selling any asset of yours; Can you? This is a very important question you need to ask yourself. One generally accepted lesson from the 2020 economic downturn for both corporations and individuals is to always have an emergency fund (EF). So, what is an Emergency Fund? How is it set up? How is it used? Let us explore.

What is Emergency Fund

An EF is a savings account set up to pool and hold a minimum of three months of calculated Non-Discretionary Income (NDI). The EF is advised as the first activity any investors should undertake. Specifically, before even investing a cent, set up and maintain an EF because this fund acts as an “insurance” or stop-gap for your income or investment portfolio.

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How is an Emergency Fund set up?

An EF captures a minimum of three months of Non-Discretionary Income (NDI). What is NDI? These are expenses incurred that must be settled irrespective of income. For instance, rent must be paid, groceries must be paid, we cannot simply stop paying utility bills because we lost our job and thus income.

Once we decide on an investment plan, the first thing to do is to list out all expenses we will incur and attach a cost to them per month or annual basis but corresponding to the period of payment. We do this to identify the necessary expenses which we refer to as the NDE.

List of expenses

  • Rent N1,500
  • School fees N500
  • Camping/Holiday N300
  • Go to Movies N100
  • Groceries N400
  • Cable TV N200
  • Gas for cars N200
  • Phone Bill N300
  • Eating out Dinner N200

Total expenses for the month are 3,500

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Next, decide which of the expenses listed above are Non-Discretionary. In other words, which of these expenses must be settled irrespective of income? Let us assume our client chooses the following as NDE:

  • Rent N1,500
  • School fees N500
  • Groceries N400
  • Gas for car N200
  • Phone bills N300

These expenses above come to a monthly NDE of 2,900, with a three months minimum of 8,700. This minimum sum means that should the client lose his job or suffer any other income interruption, these necessary expenses will be paid from the emergency fund, without the need to sell down investment assets at fire-sale prices just to raise income.

How is it used?

The Emergency Fund is simply a piggy bank. Once it is set up, you can increase the minimum saving from 3 to 4 and as high as you want to go. What is does is insulate your investment portfolio from losing any compounding or dissipation in principal because you must sell.  So, if there is income interruption due to job loss or you simply want to take a long holiday and write a book, you can do so and still meet your expenses from these savings.

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An EF is not only for downturns, as it is also good for opportunities. A friend of mine bought an almost brand new car from a work colleague that was emigrating abroad because he could pay cash immediately in short notice. Cash is always king when you are in a tight negotiation with a seller.

Your Emergency Fund should be kept in cash or near cash investments. Return on investment for the EF is secondary to access to those savings. Also, you want your EF in an investment class with fixed income with no variation in returns. this means in practical terms do not invest your EF portfolio in equities that pay a variable return or even any asset which may need documentation and visits before you can access your funds. I am also wary of a commodity like gold, which does hold value, but cannot easily be converted to cash. The recommended asset classes to invest your EF are:

  1. Call or Fixed Deposit in Banks
  2. Sovereign Treasury bills, they are easily discounted and converted to cash
  3. Certificates of Deposit with bank

If the asset call cannot be converted to cash in one activity should be avoided. Also, ask the institution if they charge fees for early withdrawal and what those fees are.

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What can I do tomorrow?

  1. Start an emergency fund immediately. Do the expense exercise, determine your Non-Distortionary Expenses, start to build up a savings pot.
  2. Focus on building up your emergency funds before building a portfolio of assets.

Patricia
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