Nigerian Small Business Owners’ Biggest Obstacle: Keeping Track of Money, Preparing & Making Use of Financial Information
Running a small business in Nigeria can be a very rewarding endeavour, but it also comes with its fair share of difficulties for entrepreneurs. Often these challenges are related to accounting and keeping proper financial records for decision making.
Nigerian SMEs and eCommerce have grown due to many entrepreneurs. Young Nigerians’ entrepreneurial ambition, rising internet and smartphone usage, and a desire to raise individual and household incomes are driving these occurrences. However, many of these firm owners are excellent in their fields and may not understand finance/accounting, making financial data maintenance and interoperation challenging. In some cases, this has killed promising firms, while in others, it has hampered growth and prevented expansion.
Entrepreneurs often run out of liquidity or cash to sustain operations, mix personal income and transactions with business income, fail to control, and monitor expenses, misunderstand basic finance and accounting principles, and fail to capitalize on financial analytics. As an accountant who has dealt with small businesses, I believe knowing these common difficulties is essential to providing realistic answers and support.
Business owners find it difficult to overcome this struggle because they may not always appreciate the value of having solid records of financial information, they may lack the time to put conscious effort into it, or their inability to pay for outside professional assistance to solve some of these problems.
THE NEED FOR PROPER BOOKKEEPING FOR E-COMMERCE SMEs IN NIGERIA
To empower SMEs in Nigeria, effective bookkeeping practices become increasingly important for reasons such as:
· Financial management: Proper bookkeeping provides valuable insights into a business’s financial health, enabling owners to make informed decisions about pricing, inventory management, and growth strategies.
· Attracting investment: Investors often require detailed financial records to assess the viability and potential of a business.
· Business growth and planning: Proper bookkeeping facilitates accurate financial forecasting and planning, enabling businesses to make informed decisions about expansion, hiring, and future investments.
· Loan & Grant Documentation: Proper financial records are important for small businesses when applying for government schemes, grants and private loans and grants.
If you are an entrepreneur interested in the services of experienced accountants and business consultants, you may proceed to the final section of this article to obtain further details regarding service offerings that will address your needs. Though, I would suggest you read this in full to have a better understanding of some pertinent issues.
On that note, let us explore some typical accounting and bookkeeping problems faced by small business owners and shed light on how to tackle them with ease.
Lack of Practical Accounting Knowledge and Use of Accounting Software
Many Nigerian small business operators may not consider bookkeeping and accounting as their specialities. Lack of expertise and experience in financial record management can lead to confusion, errors, irritation, and little to no records.
Entrepreneurs may struggle with accounting software like Excel and QuickBooks since it requires accurately documenting transactions, understanding financial figures, and making smart financial decisions. This is the first hurdle many entrepreneurs fail to overcome, abandoning their business ideas.
Nigerian business owners can solve this by learning and relearning key accounting principles that affect their companies. Lack of knowledge prevents most business owners from familiarizing themselves with basic accounting and finance terminologies. They also need accounting software training to help them run their businesses.
Inadequate Financial Records and Management of Financial Data
Data entry errors or missing details can quickly become accounting disasters. Transaction recording errors like missing entries or mistyping numbers can cause unbalanced accounts and biased financial reporting. This can make it difficult to reconcile corporate activities with bank statements and determine the company’s financial health. Incorrectly inputted information can also cause inventory counts, order delays, and customer service issues, which hurts the company’s productivity and customer happiness.
Nigerian SMEs must be careful about the data they enter into their financial records and its accuracy. This will provide solid data to support their ventures and help management and shareholders make decisions.
Ineffective Financial Statement Line-Item Tracking
Keeping track of expenses and all the sources of income for the business becomes increasingly challenging as the number of transactions grows, and transactions and records are miscategorized which makes it difficult to analyze spending patterns, and revenue sources and identify areas for cost-saving or segments that need greater focus. Receipts can be easily misplaced or forgotten, leading to lost deductions and incomplete expense records. This is not efficient, and such inefficiency can lead to serious consequences if business owners fail to show accurate business reports.
Most of this challenge can be resolved by diligent recording of transactions and proper categorization of each payment or money received, use of relevant accounting software or outsourcing the responsibility of accounting and bookkeeping to an experienced hand.
Inventory and Cost of Goods Sold Management
For many Nigerian SMEs, effectively managing physical product inventories and computing the cost of commodities sold may turn out to be intricate and labour-intensive processes. Profitability could be negatively impacted by keeping too much stock or shortages caused by inaccurate inventory records. When there is poor record keeping and a malfunctioning inventory management system, it creates a multitude of complications for the SME. Accurate monitoring of product stock levels poses a challenge for businesses, potentially leading to circumstances of excessive or insufficient inventory.
Due to stockouts, the company consequently foregoes sales opportunities and accrues excess inventory expenses. Ordering errors resulting from inaccurate records could also lead to the company incurring huge costs in storage and potential wastage expenses. Poor inventory management may also lead to significant pressures on the company’s cash flow dynamic and may hamper profitability and expansion ambitions for the business.
Overlooking The Need for Cash Flow Management and Capital Allocation
Nigerian entrepreneurs must uphold the principle that “cash reigns supreme.”
In the business world, it is said that blood is to an individual what capital is to a SME. Cash flow is the lifeblood of any business, but small business proprietors frequently undervalue it. Entrepreneurs must comprehend that inadequate management of cash flow may lead to foregone opportunities, delayed payments to suppliers, unregulated cash inflows or outflows, and challenges in fulfilling financial commitments.
A business that fails to implement efficient cash flow management practices will be unable to generate adequate profits and enhanced cash flows, which are critical for its continued viability and expansion. Tracking balance payments and accounts receivable would be challenging for a business that purchases or sells products on credit in the absence of effective cash flow management.
Interpretation and Analysis of Financial Statements and Key Metrics
Financial reporting is not just numbers, but it is also the story numbers are trying to tell. Profit or loss, balance sheet and cash flow statements can only be useful if they can be effectively understood and interpreted. Reading and interpreting financial statements can be intimidating for those without an accounting background. Business owners may find it challenging to extract meaningful insights from financial reports, hindering their ability to make informed decisions about the future of their business.
This can be resolved by ensuring there is a dedicated accountant who is experienced and understands the business, with the help of relevant accounting tools, proper analysis of financial reports can be obtained for effective decision-making.
Mixing Business and Personal Finance
This is likely the most prevalent issue that affects all Nigerian small and medium-sized enterprises. Due to the compact set-up, limited capital, and power consolidation of sole proprietorships, there is invariably a propensity to fail to allocate funds designated for business purposes from funds intended for personal expenditures. Personal and business finances are frequently intertwined by small business owners, resulting in disarray and confusion.
Engaging in this activity may lead to regulatory complications, financial data manipulation, and challenges in obtaining loans or investments. The accurate representation of a business’s profitability is compromised due to the difficulty in accurately documenting expenses. A business that combines finances may appear unprofessional to clients, potential partners, and investors, thereby damaging its reputation.
This is, in essence, a matter of personal finance in addition to corporate financial discipline. This is especially true given that most small business proprietors rely on the profits of their companies. Seeking professional guidance is crucial in this regard, as it entails the formulation of a capital retention policy or profit-sharing formula that must be followed to preserve personal financial equilibrium and guarantee sufficient liquidity for the operation of the business.
The above points were reemphasized in an article written by Dr Ola Brown on the tips that Nigerian small businesses need to be successful, she highlighted the need to hire the right kind of people to help you grow and sustain their business, and the importance of tracking the flow of cash in and out of such businesses.
Affordability of Professional Accounting and Business Advisory Services
Ultimately, the biggest obstacle facing small business owners and operators in Nigeria, which makes it difficult to solve all the problems mentioned above, is the cost associated with hiring qualified and trained accountants to provide technical support to these businesses. A well-renowned Nigerian investor posted on X a thread on his discovery of a Nigerian start-up that provides accounting services to Nigerian small business owners, highlighting the depth of the problem faced by thousands of entrepreneurs, and the need to seek professional guidance.
If these kinds of services were to be made affordable for small and medium-sized enterprises (SMEs) in Nigeria and could be customized to suit the specific needs and characteristics of each client and business, they would relieve business owners of numerous administrative obligations and enable them to concentrate more on the aspects of the enterprise to which they are more familiar with. A suitable solution is essential since Nigerian SME proprietors struggle with routine and specialized aspects of bookkeeping and financial management.
As a seasoned accountant and a business enthusiast, I and a team of other seasoned professionals have undertaken the initiative to offer these vital services to small and medium-sized enterprises (SMEs) that require assistance in comprehending their financial data and accomplishing remarkable things. Accessible and downloadable at no cost, I have compiled a free cashbook Excel sheet and supplementary materials that outline the services I and my team are prepared to provide prospective clients at an affordable rate.
All this can be found in the link here.
Services offered include (but not limited to):
- Dedicated Remote Accountant & Business Consultant
- Transaction Entry
- Bank Reconciliation
- Expense Tracking
- Budget Analysis and Planning
- Financial Modelling and Valuation Analysis
You can find a comprehensive list of the services we provide, including pricing information and additional details on this page.
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