Kayode Omosebi: Small Business Owners, Naira Blues Should Not Make You Blue

Idealism is fine, but as it approaches reality the cost becomes prohibitive. – William Frank Buckley, Jr.

Since late 2014, our currency – the Naira, has been on a steady decline against other major currencies. We can point to the demand-supply dynamics as the major influence of the Naira’s low value, especially as Nigeria remains an import-dependent nation, while the country’s most significant supplier of foreign exchange (crude oil sales) has suffered a blow due to the drop in the price of crude oil. The “Invisible hands” of the CBN also seem to have contributed significantly to the free fall of the Naira, majorly by providing an enabling environment for round-tripping.

The increase in the price of goods and services are influenced by central factors, mostly cost-push, which can directly be linked to the challenges on the exchange rate front, and demand-supply dynamics. This is definitely worrisome for a country like Nigeria, where the policy makers have always been reluctant to allow the exchange rate, to be fully market-determined. Due to the unwillingness to allow for this policy change, the policy makers have made various attempts to fix the exchange rate themselves. While one cannot quantify the magnitude and speed of the exchange rate pass-through in Nigeria, it is distinctively high.

Nigeria, as a nation is overly dependent on foreign products, and the falling Naira has led to higher cost of sales and other operation and manufacturing costs, as well as higher importation costs and taxes. We have had to spend more money to buy goods and services from other countries, resulting in low patronage and low margins. The exchange rates related cost pressure is now pushed to consumers who are becoming increasingly defensive, thereby cutting demand rather than accepting the increase, which has led to a drop in revenue for most businesses.

The President has shown support for the current monetary policy stance and also rules out devaluation and easing of capital controls in the near term. While one can question the autonomy and independence of the CBN, the bitter truth now is that we might have to live with this for a considerable period of time.

So, the big question here is “what can small business owners do to survive?”

The most obvious strategy for avoiding the Naira blues during this tough economic time is to control costs.

The next question might be “how does one cut down without compromising on the quality of your products and the efficiency of your business?”

When looking for ways to manage expenses, you first have to determine if you are incurring losses, breaking even or just barely making a profit. There are easy ways to cut down on costs so that you’re not spending where you don’t have to.

Over the years, I have found out that what most MSMEs tag as ‘necessary expenses’ are not really necessary at all. In fact, there are plenty of opportunities for small businesses to think outside the box and save.

Here, I will lay out some simple tricks that could help to intelligently cut costs, which in return will hopefully support revenue, margins and profit levels.

Review all costs based on business value
Most businesses can easily identify at least some cost savings. But the question is how those savings will affect business goals, product quality and service levels. Moreover, while variable costs may seem easiest to cut, it can be more potent for business performance to focus on turning fixed costs into variable ones, even expanding the budget for certain variable costs.

Analyze products, services and customers
Most MSMEs’ customer strategy is focused on acquiring new customers and concentrating on profitable ones. Thus, it is important to first identify which customers generate most or least value. In fact, you need to understand where value is created and destroyed, and where costs are created along the entire supply chain of the business. By analyzing which suppliers, customers, products and deals create the most value, you can avoid certain costs and reduce others.

Efficient and Integrated Financial Management
Many MSMEs lack a sophisticated view of how their financial activities fit together. There is enormous potential, however, for most MSMEs to increase the efficiency of those activities, thereby reducing costs and improving cash flow. Every business takes in and pays out funds to some degree, therefore, the ability to optimize the gathering and use of cash and credit fundamentally affects performance. It is important to look at your specific pain points; are customers paying you more slowly than you are paying suppliers? Is inefficient financial management causing unnecessary overdrafts and fees? When you understand this, you may be able to save money and keep more cash on hand. Again, the key for MSMEs is to understand how the efficiency of credit, transaction and fund-management affects the ability of the business to thrive.

Let us look at these few cost cutting tips:

Materials and supplies
It always makes sense to negotiate. Never be afraid to ask for a discount, the worst that can happen is the supplier saying no. Don’t allow yourself to be intimidated; don’t let your passion for your business cloud your judgment; and always remember if the deal isn’t right, you can walk away. Also, you can consider bulk buying.

Your supplier wants to stay in business too, and they are dealing with a tough economy just as you are, so they may be willing to offer you a better deal rather than lose a regular customer.

Consider sponsorships
Many businesses rely on regular events with their customer base and often get sponsors to help cover the costs of these events. In return they have an opportunity to advertise at the events, hence both the host and the sponsor wins.

Share your expert knowledge
TV/radio shows, newspapers, magazines and even blogs are always looking for new content; this could be your opportunity to get your name and your business out there and share your industry knowledge. This ultimately gives you and your business excellent exposure at little or no cost.

Rents and rates
While you may not be able to influence the rates you are paying, it is worth exploring whether your place of business still best suits your needs. Rent levels can be negotiated with landlords (new, old or existing) who are looking to maximize occupancy. Also bear in mind a new property may offer lower prices than you are currently paying. While it is a daunting task to relocate, the long-term savings could significantly aid not only the growth of your business but also your personal growth.

It is important to note that no two businesses are the same and each will have its own priorities even if they are in the same industry. However, what should be common to all is the desire to reduce costs and sustain margins. It makes sense to set up formal review procedures, regardless of size, on a regular basis.

Also, be careful of sporadic cost-cutting drives which in the short term, can only help the bottom line, but can eventually undermine business performance for the long haul. You need to be careful.

Take note of the following imperatives
Be proactive, not reactive. Don’t cut costs first and assess the strategic impact later. You must be willing to reverse a decision that could jeopardize the long-term viability of business performance and goals.

Don’t arbitrarily rule out investment just because it involves an outlay. Investment especially in efficiency solutions can reduce long-term costs, improve performance and deliver a net return.
critical to target costs than to analyze the business. You cannot make good decisions about what to spend, if you do not understand how your business actually generates its returns. For example, customers are obviously sacred to any business, but even customers can destroy value, thereby creating costs.

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