Times are tough, most especially for small business owners in Nigeria. Our economic environment has been marred by falling oil prices, Naira devaluation, and an overall decline in consumer spending. All of these factors, when considered holistically, translate to higher costs and ultimately lower profitability for most businesses.
However, in the midst of this, opportunities still present themselves for adaptable businesses to thrive, especially those that are able to manage costs effectively, and consider alternative strategies to engineer demand. Understanding the fundamental principle of economics that states “the higher the price of a good or service, the less it will be demanded” serves as the key to unlocking strategies to achieving growth during economic downtimes.
Here are five lessons that can be adopted to managing your business costs, remaining price competitive, and stimulating demand.
Lesson #1: Trim the Fat
Cost containment is essential to maintaining optimal operations. This exercise can drastically improve profitability in the short term, whilst positioning your organization for efficient growth in the long term. One of the significant expenses any business has to carry is staffing. Realistically, reducing salaries may not be ideal, however an alternative strategy to managing similar costs is to re-engineer operational processes to be able to enhance cost management initiatives.
Imagine a warehouse manager who requires staff for inventory cataloguing and fulfilment. Over time, he realizes that the fulfilment team is overwhelmed during evening peak hours. During the day, he requires less hands on ground as the business tends to slow down during these periods. Instead of hiring new staff, the manager decides to re-engineer his operational processes such that members of the cataloguing department can be rotated to fulfilment during peak hours. In doing so, he creates a new career progression plan whereby staff with exceptional performance track records have the opportunity to be promoted to new departments within organization.
Lesson #2: Consider Lower Cost Inputs
Input costs directly impact the price of goods and services. In an environment where the economy is slowing down, consumers would naturally lower cost alternatives, particularly for essential everyday items. This is a great time to consider sourcing made in Nigeria materials for your business to better manage production costs. An added bonus is that sourcing locally also lends support to growing sectors within the economy that may have suffered growth challenges due to heavy importation.
Let’s explore the case study of the building contractor who is expected to deliver a fully furnished office to a cost conscious client. One alternative would be to import furniture items from abroad, however considering the prevailing Naira devaluation trend, the contractor decides to source wooden boards locally and have the furniture items carpented, assembled and finished on site, thereby minimizing his cost and returning better value to his client.
Lesson #3: Avoid Currency Mismatch
The fundamental lesson here is this: if you earn in Naira, spend in Naira. This would minimize your exposure to FX related risks which may skew profitability. Over the past 5 years, the Naira has swung upwards from N150 to N250 against the dollar, with indications of further depreciation ahead. Imagine an importation business taking on a 5yr term loan obligation during this period, whereby the currency has depreciated by over 60% whilst interest rates have risen. Unless a business has calculated advanced ways of hedging FX risk, the burden of currency mismatch can severely cripple profitability.
The travel industry in Nigeria has experienced some interesting changes over the past few years. International debit card usage, combined with efficiencies in payment systems allowed for individual consumers to purchase travel tickets directly from airlines, thereby circumventing agencies for bookings. However, recently introduced regulations have limited the access individuals now have to foreign currency on their debit cards. Several travel agencies have been able to capitalize on this opportunity by offering Naira payment options to intended travellers, whilst also settling obligations to airlines with local currency.
Lesson #4: Diversify Income Streams
We are all familiar with the saying that one man’s trash is another man’s treasure. This lesson is intended to make us think creatively on ways that your outputs can be maximised using the same basic inputs.
Imagine you own a supermarket that sells dairy products. You could expand your product offerings to include freshly baked consumables like breads, cakes, and other dessert items that can be prepared using ingredients readily available from your store. Ordinarily, these items would be discarded at a loss once they reach their sales expiration period, however, converting them into readily consumable products elongates the shelf life and also creates new profit opportunities.
Lesson #5: Embrace Technology
Technology empowers businesses. Over time, successful organisations have evolved from being “man driven and system managed” to being “system driven and man managed”. This simply means that many manual tasks and processes can be migrated using IT based solutions for your business. Hire humans to do the thinking, while computers do the work. Fortunately, the internet and information technology space has been democratised in a manner that offers a wide variety of solutions for next to nothing or free.
A game changer in this space has been e-commerce. Imagine being able to sell and promote your goods and services to millions of consumers from your smart phone or computer. GTBank’s SME MarketHub offers businesses the ability to create online storefronts for free. Furthermore, the platform offers free marketing and advertising to an ecosystem of over 10 million individuals at no additional cost.
Tools such as these, provide easy and cost effective solutions to create efficiencies, attract demand, and ultimately increase profitability. You don’t need to start with a lot, but every effort (no matter how simple) counts towards building your business to weather the storms of today and tomorrow.