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Common legal and general mistakes made by new businesses (Part 2)

Starting a new business is tough and there are a number of legal and general mistakes made by small businesses.

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Five factors stopping you from starting your new business and the way out, Improve Google rankings for your business using these tips, Common legal and general mistakes made by new businesses (Part 2), Tips to help you launch your own business in 2020 (Part 1), What to do with N1m, if I had one (Part 2)

We have established that starting a new business is tough and in addition to the economic and operational risks that every business faces, there are a number of legal and general mistakes made by small businesses which can and do have significant effects on their success or failure.

Mixing personal and business expenses

Money and time are the biggest investments in a startup, and often business and personal expenses become indistinguishable. This can be one of the major sources of confusion when taxes are filed and, in some cases, can lead to income authorities cancelling various deductions on an ad hoc basis and, as a result, higher tax expenditures are levied. Therefore, startups must have a financial account from the beginning and separate records as well.

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Not registering your name

If you intend to be a sole proprietor or a corporation, you must ensure that no one else is using the name you have selected for your firm. Make sure the name is available before making a logo, designing a web app, or printing business cards.

Not having a nondisclosure agreement

While exploring how to start your business, you are most probably talking to many people in the industry you wish to operate in—talking to professionals and sharing a lot of information about your business idea while trying to hire people, get advice, get estimates and retain professionals. A confidentiality agreement, or non-disclosure agreement, will help ensure that the information you share with others remains private. Also, stipulate consequences for violation of rights stated therein.

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Accepting handshake deals

Never, ever work without a written contract. Too often, entrepreneurs value speed over accuracy when it comes to detailing relationships with partners, vendors, customers and even employees. They might accept “handshake deals” or verbal agreements. In theory, an oral contract may be enforceable in court if it’s a short-term contract. In practice, however, you’re going to end up in he said/she said fight and there’s no guarantee you’ll get a good outcome. A written contract, on the other hand, forces both parties to consider every aspect of the deal and helps make sure everyone understands what they’re signing on for. A clear contract can help you avoid the kind of disputes that turn into legal troubles in the first place. And if you do end up in court, a clear contract will help make sure that the deal is enforced.

[READ MORE: Common legal and general mistakes made by new businesses (Part 1))

Unfortunately, there are more than a few horror stories of novice entrepreneurs believing verbal agreements are set in stone. No matter the case, put it in writing. Contracts should be well-defined and signed by all parties involved—whether that means outlining roles and ownership with a co-founder, making an offer to an employee or drafting business points with a vendor.

Engaging professionals only after a problem arises

A good accountant or lawyer will be able to advise you of the best way to structure your business to achieve your business goals. It may initially cost some money to get this right, but it is one of the best insurance policies you will take. Understanding the pros and cons of being a sole trader, company, trading trust, limited liability partnership is vital to know at the beginning of a business’s life. By far the biggest mistake of all is becoming an “emergency entrepreneur” — someone who puts off all legal issues until he or she is being sued.

The time to engage with a legal professional is not when threatened with a lawsuit. Healthy people see the doctor or dentist for preventative care; healthy businesses should take the same approach, and establish a relationship with a good lawyer early on in a business’s lifecycle. Knowing more about the legal pitfalls and landmines out there will help keep any business entity on a solid foundation. This way, entrepreneurs can focus on the reason they started the business in the first place.

Expanding too soon

Expanding your business before it has the key resources (cash, access to equity, access to credit) or key structure in place can lead to disaster. Don’t underestimate organic growth. It may appear slow at first, but it is solid growth.

Failing to adapt to change

Multi-generational companies (i.e., companies that were handed down from father to son, or grandfather to son to grandson), with the newer generation failing to adapt to the changes in their industry. Instead, they adopted the thinking of the previous generation which is: “that is how we always did things.” Now with the rise of the digital age, businesses that fail to embrace technology or to see how to exploit it in their businesses are falling behind.

Essential soft skills that will help you succeed in your business

Reliance on one key customer

This can be deadly, especially if that one key client is the government. This is because a change of government or government policy can mean the end of your business. Outside of government, if your one key customer fails in their business dealings, it almost inevitably means that you too will fail. Not to mention that business analysts see reliance on one key customer as ‘high risk’.

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[READ ALSO: What to do when interest rates are low in 2020)

Failure to manage cash flow

Cash flow is vital for all business operations. Cash can be likened to blood within our bodies. When you run out of blood, you die. It is all very good to appear profitable in your accounts, but it is not good if those profits don’t convert to cash in your bank account. 

Let’s wrap up

Starting a new business is pretty exciting and challenging, and your business has a plethora of growth potential, but there is also the possibility of making quite costly mistakes as you start. If you learn to avoid the most common mistakes made by startups, your startup can run smoothly from the beginning and your business is better prepared to be successful and profitable in the long term.

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Rack Centre to create West Africa’s largest data centre in $100m expansion

Rack Centre’s expansion programme will increase capacity to a total net lettable white space of 6000 square metres.

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Leading carrier neutral data centre operator in West Africa, Rack Centre, has announced an expansion programme that will increase capacity to a total net lettable white space of 6000 square metres, which will pave way for 13MW of  IT power capacity in its Lagos campus.

This was disclosed in a press release by the company, which was seen by Nairametrics.

The expansion is expected to bring carrier neutral scale to West Africa, and this is in response to increasing demand for data centre space from cloud uptake, telecommunication investment and outsourcing of IT facilities by enterprises in the region.

The funding for this expansion will come from a $250m pan-African data centre platform, established by Actis and Convergence Partners, a leading ICT infrastructure investor in Africa.

In addition to the expansion in  Rack Centre, the platform is also actively developing additional buy and build opportunities across Africa, to establish a network of carrier neutral data centres aimed at catering to carrier, cloud and hyperscale customers. 

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Back story:  It is noteworthy that on March 2020, in a bid to pave way for the expansion programme, Actis, a London private equity firm, announced an investment in Rack Centre, taking a controlling stake in the business alongside Jagal.

Why this matters

Nigeria is a key entry point for global telecommunications, content, and cloud players seeking access to the region. Despite the potentials of the country; with 138 million internet subscribers, more than any country in Africa or Europe, and the largest population and GDP in Africa, a lack of cost-effective, energy-efficient IT infrastructure, has been a constraint to doing business in the region. 

However, in a bid to create unrestricted connectivity between customers, telecommunication carriers, and internet exchange points within its data centres in the region, as a unique scale carrier neutral player, Rack Centre brings global best practice to Nigeria, as the first carrier neutral data centre in the region, to achieve Uptime Institute Tier III Certification of Constructed Facility (TCCF).

The global leaders that the platform has engaged include:

  • Tim Parsonson, Co-founder, Teraco Data Environments – the largest carrier neutral operator in Africa, who joins the Board as Chairperson on the board.
  • Frank Hassett, a veteran of the global data centre industry and previous Vice President of Infrastructure, at Equinix, brings over 1300MW of build and operate experience, to assist with hyperscale expansion.

While speaking on the expansion of capacity, Andile Ngcaba, Chairman of Convergence Partners, said;  “Africa is at the start of a critical time in its development, as the 4th industrial revolution offers the chance to leapfrog many of Africa’s challenges, and harness the immense potential of its people. Convergence Partners is delighted to partner with Actis in accelerating the growth of high quality data centre infrastructure, an indispensable part of the foundation of this revolution in the region.”

Dr Ayotunde Coker, Managing Director of Rack Centre, emphasized that the group is proud of the quality and scale bar which they have set in the region.

“We are proud of the quality and scale bar we have set in the region and are scaling to be the de-facto digital data hub for West Africa

“Mass adoption of digital working models and content distribution is driving growing investment in the region and Rack Centre offers a world class location to house these IT and telecoms facilities,” Coker said.

Supporting this ambition, engineering consultancy Arup, have been appointed for the project.  The leadership status of Arup is uncontested,  having designed over 2,000MW of IT capacity for industry-leading tech giants, and co-location providers across the globe.

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CBN gives up on its policy of attracting dollars

CBN has given up its policy of attracting ‘hot money’ as it selects an alternative way to fight inflation.

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Godwin Emefiele, CBN expands scope of regional banks in Nigeria, gives compliance timeframe

The Central Bank of Nigeria (CBN) issued a monetary policy communique explaining why it cut its monetary policy rate from 12.5% to 11.5%, the first drop since May 2020 when it slashed MPR from 13.5% t0 12.5%. The cut in rates means it is no longer targeting foreign investor inflow as a basis for keeping the exchange rate stable.

The CBN has held MPR high for years due to high inflationary pressures believing that higher MPRs could lead to a lower inflation rate. However, the Covid-19 pandemic and the increased price of fuel and electricity suggest this is a battle already lost via hawkish monetary policy.

Explore the Nairametrics Research Website for Economic and Financial Data

What they are saying: According to the bank, it believes the higher inflation Nigeria is facing is not due to monetary policy but due to “causal factors” which are outside of its immediate control.

“In the view of the MPC, so far, evidence has not supported the rising inflation to monetary factors but rather, evidence suggests nonmonetary factors (structural factors) as the overwhelming reasons accounting for the inflationary pressure,” the CBN stated.

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READ: CBN offers N1.1 trillion intervention fund to support real, health sectors

The structural factors the CBN is referring to are rising in prices of fuel and electricity as well as cost increases emanating from the devaluation of the naira.

“Accordingly, the implication is that traditional monetary policy instruments are not helpful in addressing the type of inflationary pressure we are currently confronted with,” the CBN added.

These issues mean the CBN faces a quagmire in how to combat inflation as the traditional measures it has typically deployed might not work effectively.

READ: Nigerian banks have written off N1.9 trillion impaired loans in past 4 years

Forgo hot money:  The apex bank toyed with increased MPR to combat the high inflation rate but opined that doing so could lead to an even deeper recession despite the benefits of attracting foreign capital.

“The Committee noted that the likely action aimed to addressing the rise in domestic prices would have been to tighten the stance of policy, as this will not only moderate the upward pressure on prices but will also attract fresh capital into the economy and improve the level of the external reserves. It however, noted that this decision may stifle the recovery of output growth and thus, drive the economy further into contraction.”

READ: CBN Vs NESG: Waving the white flag for the benefit of Nigerians

In 2017, the CBN adopted a hawkish monetary policy stand of increasing MPR and offering interest rates as high as 18% via its open market operations bills.

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  • The policy helped attracted billions of dollars in capital rising to as high as $13.4 billion in 2019. It dropped to as low as $332 million in the second quarter of 2020.
  • Foreign investors have basically stopped inflowing forex into the control as yields have crashed and repatriating it is now a major challenge.

READ: Nigeria’s inflation rate jumps to 12.82%, highest in 27 months

The other option: Deciding against increasing MPR means the CBN had to consider a dovish policy, which requires that they cut monetary policy rates and intervene in sectors of the economy that can address the supply side factors it cited. Supply-side factors are price-related increases emanating from high production, storage, and distribution cost of finished goods and services meaning that price will remain high despite stable or lower demand.

“On easing the stance of policy, the MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment, and support the recovery of output growth. Members were of the opinion that the option to lose will complement the Bank’s commitment to sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19. In addition, the liquidity injections are expected to stimulate credit expansion to the critically impacted sectors of the economy and offer an impetus for output growth and economic recovery,” the CBN stated.

READ: Labour sets September 30th as deadline to go on strike

What this means: By dumping inflation targeting from the demand side, the CBN is betting that spending money on stimulus programs will pay off down the road as cheaper long term credit will reduce cost of goods and services and will eventually reflect in the lower inflation rate.

  • The CBN did not state where it sees the inflation rate and when it will drop to its new target by relying on supply-side management as strategy.
  • The downside of this strategy is that there is very little impetus for foreign investors to purchase CBN securities at very low-interest rates.
  • This shuts the door to the reliance of foreign portfolio inflows to shore up dollar reserves leaving us with investors who may want to return to the stock market.
  • If oil prices fail to pick up and foreign investor inflow is not forthcoming, then there will likely be heavy pressure on the CBN effectively worsening things.

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De facto Government: CBN explains why it will keep funding the economy

The Central Bank of Nigeria provided reasons why it will keep spending on development activies such as its intervemtion funds in the agricultural and energy sectors.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

The Central Bank of Nigeria provided reasons why it will keep spending on development activities such as its intervention funds in the agricultural and energy sectors. The central bank has carried on as a form of de facto government in recent years particularly in the Covid-19 months, funding several developmental activities and sectors in the economy.

The explanation was provided in its monetary policy communique read out by the CBN Governor, Godwin Emefiele following the end of the monetary policy committee meeting held on Tuesday.

READ: Despite COVID-19, top Nigerian Banks declare N36.7 billion dividends

According to Mr. Emefiele, it will keep spending because the Federal Government is currently incapable of funding development programs because it is facing revenue shortfalls. The CBN reckoned that the economy is faced with likely stagflation (a combination of an economic recession and high inflationary environment) even as Nigerians still have to deal with an increase in fuel and energy prices. It opined that it had to work harder to combat the pressure the price increases will have on Nigerians.

“The Committee was therefore of the view that to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.

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“At present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.

Explore the Nairametrics Research Website for Economic and Financial Data

“Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy. This is the reason MPC will continue to play a dominant role in the achievement of the goals of the Economic Sustainability Program (ESP) through its interventionist role to navigate the country towards a direction that will boost output growth and moderate the level of inflation.”

As part of its plans to inject stimulus into the economy, the central bank committed to a stimulus package of about N1.1 trillion through the government’s Economic Sustainability Plans revealed in June.

READ: Banks lay-off 2,477 staff during lock-down

CBN to the rescue: Over the last few months the CBN has been at the forefront of leading developmental activities in the country despite overseeing monetary policy and not fiscal policy.

  • The role it is currently playing should be that of the Ministry of Finance, but with government revenue on decline, it believes it has no choice but to come in as a spender of last resort.
  • The CBN through its development finance responsibilities has the powers to fund activities in the economy that it believes will create jobs and reduce the inflation rate.

READ: UK financial institution to put $5 billion to work in Nigeria, others 

But more recently, it has been criticized for expanding its balance sheets and playing too big a role in backstopping nearly all major developmental programs of the Buhari administration.

  • The CBN is currently spending trillions funding the agricultural sector
  • It has also set aside hundreds of billions of naira in funding SME’s through NISRAL and partner microfinance banks
  • There is also several targeted private sector spending in the areas of power, healthcare, real estate, entertainment etc.

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