Investment Tips for SMEs
Gbolahan Aina (ACS), a consummate investment banking professional and portfolio manager at Cordros Asset Management Limited, shares tips on investment strategies for SMEs and entrepreneurs, drawing from the present state of economic uncertainty in Nigeria.
Remember that timeless adage ‘save for the rainy days’? Well, the rainy days are here. I sure hope you saved because our beloved country obviously failed to heed the adage.
In a nutshell, Nigeria as a country failed to save for the rainy day when crude oil traded over $100 per barrel against a budget benchmark of $77.5 per barrel in 2014. With little or no savings and a depleted revenue stream, the nation’s macroeconomic fundamentals have been negatively impacted. Now, the country’s citizens (perhaps, most especially, entrepreneurs) grapple with dozens of challenges as economic hardship bites hard. Nigeria obviously typifies the resource curse or the paradox of plenty – what should ordinarily be a blessing is the reason the country is in this current debacle. But as the country tries to navigate its way out of this economic uncertainty, I have highlighted some investment lessons for small and medium-sized enterprises (SMEs) that can be drawn from the Nigerian narrative.
From an investment perspective, Nigeria failed to save when it had revenue surplus. It also did not diversify its mono-product export revenue base and invest in critical infrastructural whose benefits could have transcended generations unborn. In other words, the country did not save enough when sales were up, and also did not diversify its offerings and invest in its core operations. Point to take? Every SME must see investment as a principle and a critical item in its company’s financials. Individuals have varied investment objectives. While some might invest to meet certain financial obligations like paying for an MBA or buying that dream house, others might invest to ensure they maintain a certain standard of living after retirement when income becomes irregular and unpredictable. In a similar vein, organisations invest in human capital, technology and processes to ensure they have competitive advantage and greater market share. Whatever the investment objectives, the following investment tips drawn from the Nigerian story have the potential to enhance the income profile of SMEs.
1. KEEP AN EYE ON YOUR COST PROFILE
Cost must be seen as a tool for achieving the desired outcome and not the outcome to be achieved. A vital question SMEs must always ask is: ‘Are there cheaper and more effective alternatives?’ Every entrepreneur must keep an eye on his cost to income ratio or its expense to revenue ratio.
2. INFLATION PROTECTED INVESTMENT
Inflation has the potential of eroding the value of one’s investment, thereby leading to a negative real return on investment. SMEs must seek investment vehicles that have returns in excess of inflation rate, thereby offering a positive real return on investment.
3. DIVERSIFICATION
Simply put, it is spreading your risk across various asset classes or not putting all of your egg in a basket. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
4. BUILD A CASH CUSHION FOR FUTURE ENTREPRENEURIAL VENTURES
This is also referred to as an emergency fund. It is an amount that is set aside for unexpected future occurrence in business. It can be for an unforeseen crisis or for opportunistic investments. As a business entity, it is pertinent to put sufficient amount aside so that you can keep some dry powder when new opportunities present themselves. Always remember, ‘Cash is King’!!!
5. DIVERSIFY AWAY FROM YOUR BUSINESS
When investing, SMEs should seek investments that are counter cyclical to their industry and business cycle. If their business is heavily correlated to the broader economy or public equity markets, a counter cyclical asset such as commodities may be attractive.
SMEs are vital to the health and stability of any nation as they constitute a large portion of the employment base and a sizable chunk to a country’s GDP. The investment tips listed above will help SMEs in diversifying their portfolio to mitigate risk and absorb business shocks.
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