As spelt out in the holy bible “money answereth everything”, while that is true, it is expedient to note that hard work does not guarantee wealth, smart work does.
Understanding wealth-making principles, being aware of economic and social policies and careful planning as a business owner is key to a sustainable growth.
While these wealth Ps are subjective and peculiar to business owners, lessons that can be drawn from the plethora of challenges Nigeria is faced with can provide objective ways to ensure your business thrives even in harsh times.
It is important to note that one’s action or inaction can cause a ripple effect either positive or negative on other factors which play important roles in wealth creation and sustainability.
The last four years have seen Nigeria’s economic growth barely grew 2 percent despite an average growth of about 5 percent, 4 years prior 2015. This can be attributed to a number of reasons ranging from reduced foreign direct investment, crude oil price slump, infrastructure deficit to mention but a few.
The year 2018 saw Nigeria foreign direct investment fall to its lowest level in the last 13 years to $2.2 billion on the back of perceived harsh regulations of both the fiscal and monetary authorities on existing foreign direct investments.
A chat with some analysts on this reiterated the need for the federal government to create a less uncertain business environment where FDI’s confidence are strongly built and not scared of sudden negative fiscal policies against them.
A popular wise saying states, “no man is an island.” Investment is a key success ingredient to grow a start-up business and attracting such investment is largely dependent on how conducive your business environment is to investors. Policies can either usher investors through the exit door or welcome them with open arms.
The slow growth in Q4 2018 reflected among other things the short fall in Nigeria’s FDI position being the life wire of any economy.
The Nigeria federal government is a small fraction of the entire economy hence why despite an increase by N4.96 trillion in total expenditure in the last five years to N23.29 trillion which accounts for about 7 percent of GDP couldn’t translate into economic growth.
Problems with undiversified income stream
During periods of oil price shock, the Nigeria’s economy had always suffered the consequences of an undiversified income stream as shocks deplete her foreign reserve, threatening naira value against other currencies.
The year 2016 is a good point of reference when the economy slid into a recession following a plunge in crude oil prices to levels below $30 per barrel which saw earnings of a lot of companies nosedive and performances poor during the period. This therefore reawakened the federal government’s consciousness on the need to diversify the economy.
Great investment experts have in time past attested to the benefits accrued to a diversified portfolio although a few insist on putting your eggs in one basket where all your attention will be.
However, for a business faced with both systematic and unsystematic risks (diversifiable and non-diversifiable risks), an expanded income stream is most advisable as effects of shocks within the industry and economy at large could have varied impact on revenue stream performances.
Every business is located in an industry which forms the basis of its revenue stream(s), however avenues like the capital market are for all to profit within irrespective of the industry played in.
Debt levels
In the last five years, Nigeria has doubled its domestic and external borrowing, to fund its ever-growing budget deficit under the current government.
Government’s desire to fund deficits to spur growth drove the country’s debt stock during the period to N24.94 trillion, up from N12.06 trillion that is an increase by 107 percent. Budget deficit of N9.16 trillion accounted for 71 percent of the N12.88 trillion increase.
While the debt levels aren’t really the problem when considered as a percentage of GDP which is low compared to other African countries, the challenge remains Nigeria’s debt service to revenue ratio which is about 70 percent, hence putting a strain on her debt affordability metric and growth potential as more revenue is expended on interest payment.
Although debt financing is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money, A business needs to balance the use of debt and equity to keep the average cost of capital at its minimum.
Investors’ negative sentiment
The prevalence of investors’ negative sentiment in the Nigerian stock market has seen the market trend bearishly recording a negative performance of 12.09 percent as at Thursday. This is on the back of investors’ pessimism on current administration and responses to regulatory actions.
Investors’ sentiment is driven by confidence on policy directions of both fiscal and monetary authorities. Start-up businesses serve both customers and stakeholders; hence policies and output can either boost or dampen confidence levels.
A company must ensure market moving policies to keep sentiments strong and boost growth and profitability.
The above are fundamental challenges faced within the Nigerian economy and provide lessons to businesses as they play within industries.
