Greena Partners — Staging

Category: Business

  • Early Warning Signs of Financial Crisis

    Early Warning Signs of Financial Crisis

       
    Early Warning Signs of Financial Crisis

    What They Are, Causes, & How to Avoid Them

    Financial crisis occurs when a business is unable to meet its financial obligations, including payment of salaries, acquiring inventories and supplies, or settling short-term financial obligations when the need arises. Such a financial situation can impair the ability of a company to take advantage of market conditions or operate on a going concern basis. Financial crisis does not happen overnight, rather  it builds up gradually. The smartest CFOs and finance professionals know how to read between the numbers and take proactive steps to avoid disastrous financial outcome.

     

    Outlined below are some of the financial and non-financial red flags to watch out for and how to avoid them:

    Financial Red Flags

    (i). Declining Gross Profit Margin

    What this means: Input costs such as raw material, labour, overheads, etc are rising at a faster rate than revenue. When this happens, gross profit will be shrinking.

     

    Causes: Poor pricing strategy, inefficient production, wastage, and spoilage.

     

    What to do:

    • Determine product, service, or segment contribution margins to identify the loss-makers
    • Ensure judicious and efficient use of production inputs
    • Reduce overhead costs and avoid wastages without compromising quality.

     

    (ii). Liquidity Problem

    What this means: This stems from the inability of a company to pay salaries, acquire inventories and supplies, settle short-term financial obligations as they become due.

     

    Causes: Poor working capital management, economic downturns, poor management oversight, under capitalization (overtrading), market gyrations, economic and political instability, etc.

     

    What to do:

    • Ensure effective and efficient management of each component of current assets and current liabilities
    • Monitor and control cash flow of receipts and payments
    • Invest surplus funds in short-term marketable securities e.g. treasury bills
    • Strike a balance and design suitable credit terms for your customers
    • Offer trade discount to encourage early settlement
    • Avoid delaying payments to vendors or suppliers
    • Automate invoice processing.

     

    (iii). Inventory is Increasing Without Sales Growth

    What this means: Inventories are not converted to sales as expected.

     

    Causes: Poor planning, overproduction, stock obsolescence, low customer demand or patronage.

     

    What to do:

    • Implement inventory turnover ratio tracking
    • Ensure periodic stock aging reviews
    • Engage in aggressive marketing to improve sales
    • Encourage early payment discounts

     

    (iv). Increasing Debt and Repayment Problem

    What this means: More borrowing and inability to pay when the need arises. This makes a business susceptible to high interest rates, undue pressure, and potential dilution of ownership structure.

     

    Causes: Over-reliance on debt financing, declining revenue, high debt-to-equity ratio, poor cash flow management, lender restrictive covenants, macroeconomics factors such as high interest rates.

     

    What to do:

    • Understand total debt structure, including the principal, coupon rates, maturity dates, restrictive covenants (if any)
    • Perform periodic debt service coverage and gearing ratios
    • Communicate and negotiate debt restructuring early to ease cash flow pressure
    • Prioritize debt repayment to enhance creditworthiness
    • Improve cash flows
    • Engage financial advisor to provide requisite guidance on financial strategy and debt management.

     

    (v). High Debtors Collection Period

    What this means: Sales are made on credit, but customers are not paying on time, leading to liquidity problem. This increases credit risk.

     

    Causes: Too liberal credit terms, poor cash flow management, lack of proactive measure to collect receivables.

     

    What to do:

    • Offer early payment discounts to customers
    • Tighten credit policies
    • Improve collection processes
    • Use the service of a debt factor or debt collection agent
    • Compare your debtor collection period with that of your comparable companies in the industry to set realistic goals.

     

    (vi). Inaccurate Budget and Forecast

    What this means: This arises when the actual results are different from the budget estimates.

     

    Causes: Poor financial planning, unrealistic assumptions, and poor budget execution.

     

    What to do:

    • Ensure financial data are reliable and accurate
    • Thoroughly scrutinize all relevant assumptions to ensure they are realistic
    • Leverage technology to ensure standardization and improve data analysis and key performance indicators
    • Set clear roles, foster collaborative culture, and provide training
    • Regularly monitor actual performance with the budgeted figures and forecast to enhance decision-making.

    Non-Financial Red Flags

    (vii). Low Employee Morale

    What this means: Employee lacks motivation and dissatisfied with work leading to absenteeism, low productivity, and high turnover rates.

     

    Causes: Ineffective management, lack of recognition, poor rewarding system, lack of growth opportunities, etc.

     

    What to do:

    • Set clear expectations and goals
    • Gather employee feedback
    • Track HR metrics, link them to financial KPIs, and flag abnormal patterns
    • Encourage open communication
    • Create a positive working atmosphere
    • Pay liveable wages
    • Reward exceptional performance and behaviour
    • Encourage openness and respect for all
    • Promote inclusion and diversity
    • Provide equal opportunity to thrive in the workplace
    • Promote teamwork and collaboration
    • Offer training and opportunities for employees to expand their skills and grow their careers

     

    (viii). Loss of Confidence

    What this means: Suppliers, customers, and investors are not satisfy with the company’s performance, leading to strained relationships, strict credit terms, lack of patronage, and withdrawal of investments.

     

    Causes: Poor performance, constant delay in payment, and lack of trust.

     

    What to do:

    • Monitor credit terms utilization
    • Foster open communication with relevant stakeholders
    • Improve customers satisfaction and experience
    • Build trust and relationship
    • Prioritize key supplier relationships

     

    (ix). Over-Reliance on Few Clients

    What this means: This is a business risk where significant revenue or profitability of a company depends heavily on few customers. This can have financial repercussions and make a business unduly vulnerable.

     

    Causes: Lack of, or inadequate marketing and sales efforts, too comfortable with big clients, lack of capacity to serve many clients at once, and weak strategic planning.

     

    What to do:

    • Build recurring revenue streams
    • Diversify client base
    • Strengthen client relationships
    • Increase marketing and sales efforts
    • Create cash reserves and flexible operations in case of sudden loss of client.

     

    (x). Weak Corporate Governance

    What this means: This is one of the root causes of financial distress in many organizations.

     

    Causes: Poor oversight and accountability, board’s risk blindness, corruption and fraud, strategic missteps, erosion of stakeholder confidence, unhealthy company culture, regulatory breaches and penalties.

     

    What to do:

    • Strengthen the board of directors by appointing competent, independent, and diverse individuals with requisite experience
    • Establish robust internal controls system
    • Foster open communication with relevant stakeholders, including shareholders, employees, regulators, and creditors
    • Develop effective risk management framework
    • Ensure transparency in financial reporting
    • Promote ethical culture and leadership.

    In Summary

    When a company is struggling with operational and financial obligations, or the financial performance of the organization is on a downward trend, or maybe its profitability ratios, including return on capital employed, profit margin, or return on asset are constantly declining, it is a red flag to financial distress. Actions need to be taken quickly to avoid a corporate catastrophic outcome.

     

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  • Business Expenses

    Business Expenses

     

     

    Business Expense

    Meaning, Tax Implication, & Practical Examples

    Business Expenses

    These are expenses incurred in the ordinary course of a business. They are expenses a company incurs in running the day to day business activities. These expenses are deducted from the gross profit in arriving at operating profit before interest and tax in a company’s statement of profit or loss. However, it is essential that business expenses are tracked and recorded timely for strategic decision making and to minimise tax liability.

     

    Business Expense and Tax Deductibility

    Many business expenses are tax allowable deductions. They are recorded as operating expenses in the statement of profit or loss and must be well documented for audit and tax purposes. However, for an expense to qualify for tax deductibility:

    • It must be wholly and reasonably incurred in generating the revenue or income for the period
    • All records and relevant documents, including receipts and invoices attributable to the expenses must be accurately kept
    • Consistent with the Nigeria Tax Act 2025, any expense in which VAT was due but not deducted, or any imported item on which import duty or levy was not charged will not qualify for tax deductions.
    • All private expenses are not tax deductible.
    • Any expenses relating to penalties, fines, bribes, kickbacks, and political contributions are not allowable for tax deductions.

    Categories of Business Expenses

    Basically, business expenses can be categorized into direct costs, indirect costs, and interest costs.

     

    Direct expenses

    These are costs that are directly attributable to producing a product or service. Direct costs vary in proportion to production volume. This means that the higher the unit produced, the higher the direct costs that will be incurred. Examples include direct materials and components, direct labour, manufacturing supplies, etc. The direct costs are deducted from the revenue in arriving at gross profit.

     

    Indirect Expenses

    These are overheads incurred in running the business activities. Indirect costs are not directly related to producing a product or service. Examples include office or factory rent, salaries, marketing and advertising, depreciation, utilities, etc. Operating costs are usually deducted from the gross profit in the determination of operating profit before interest and tax.

     

    Interest Costs

    These are costs arising from debt, loans, borrowing, or financing activities. Examples include interest on bank loan and overdraft, interest on lease, interest on debt or borrowing.

     

    Common Examples of Business Expenses

    The following are some of the examples of business expense:

     

    1. Wages and Salaries
    2. Rent
    3. Utilities
    4. Marketing & Advertising
    5. Staff Training
    6. Meals & Entertainment
    7. Insurance
    8. Bank Charges
    9. Supplies
    10. Maintenance and Repairs
    11. Depreciation
    12. Professional Fee
    13. Dues and Subscriptions
    14. Gifts & Donations

     

    Let’s explore each line item in detail:

     

    Wages and Salaries

    These are payments to workers, employees, and other staff during the month under consideration, for their effort to ensure business continuity. They represent the compensation paid to workers or staff for the services rendered to a company or employer. Generally, wages and salaries account for significant amount of operating expenses. Wages differ from salaries and their key difference are stated below:

     

    Difference Between Wages and Salaries

    The key differences between wages and salaries can be explained as follows:

     

    • Basis of Payment: Wages are paid hourly, daily, weekly, or piece-rate. On the flip side, salaries are paid monthly
    • Stability: Wages payment is less stable and it fluctuates, depending on the number of hours worked. Salaries are more stable and based on fixed payment structure.
    • Overtime Pay: Wages are eligible for overtime pay. Salaries on the other hand, may or may be eligible depending on the organizational policy.
    • Job Type: Wages are suitable for manual, casual, skilled, and unskilled labour. Salaries are mostly appropriate for professionals and administrative workers.
    • Fluctuation: Wages paid to workers vary or fluctuate depending on the number of hours worked or units produced. Whereas the salaries paid to workers or employees are fixed in nature i.e. it does not fluctuate.
    • Accounting Classification: In financial accounting, wages are classified as cost of sales as a deduction from revenue in arriving at gross profit, if it relates to production. Whereas salaries are generally classified under operating expenses in determining operating profit before interest and tax. In addition, for the purpose of cost accounting, direct wages are regarded as prime cost of production, while salaries are treated as factory overheads or administrative expenses.

     

    Rent

    This represents the consideration paid to a landlord or property owner by a tenant for the use of an asset, including land, building, or property for a specified period. The consideration or fixed periodic payment gives the tenant the right to use or occupy the property. Generally, rent is paid monthly, biannually, or annually, depending on the agreement between the parties (i.e. landlord and tenant).

     

    Key Characteristics of a Rent

    • Contract Based: It is governed by a lease or rental agreement. The contractual agreement will expressly state the responsibilities of both parties on the property.
    • Ownership: The tenant does not own the property, only has the right of usage.
    • Frequency of Payment: Rent is paid periodically, e.g. monthly, quarterly, biannually, yearly.
    • Payment: Rent is a fixed periodic payment or can be reviewed depending on the contractual agreement.
    • Accounting Treatment: A tenant or lessee will treat rent as an expense, while the landlord will record as an income in the statement of profit or loss.

     

    Types of Rent

    • Office Rent: This is paid for the use of office space or premises
    • Factory Rent: Amount paid for the use of factory building or warehouse
    • Residential Rent: Payment by an individual to a landlord to live in a house or apartment
    • Equipment Rent: This is paid for using tools, machinery, plant, or equipment own by a third party
    • Land Rent: Paid for the land used for agricultural or commercial purposes

     

    Utilities

    These are expenses incurred for basic essential services required for running a business, including electricity, water, gas, waste disposal, heating, cleaning, internet, telephone, etc.

     

    Common Types of Utility Expenses

    • Electricity: To power computers, machines, and provide lightening
    • Water: Required for general cleaning activities and washing
    • Gas: For heating or powering certain equipment
    • Internet & Telephone: For communication and data usage
    • Waste Disposal: For trash removal and sanitation services

     

    Marketing & Advertising

    These are expenses incurred by a business for the purpose of promoting a product or service, attract new customers, generate revenue, and build brand awareness. These expenses are essential to ensure business growth, continuity, and market competitiveness.

     

    Components of Marketing and Advertising Expenses

    • Digital Advertising: Social media ads (e.g. Facebook, Instagram, LinkedIn), Google ads, YouTube ads.
    • Traditional Advertising: Paid ads on TV, radio, newspapers, magazines, billboards.
    • Promotional Materials: For printing flyers, banners, brochures, branded merchandise.
    • Events & Sponsorships: For exhibitions, trade shows, product launches, brand sponsorships.
    • Marketing Staff Costs: Salaries of marketing department staff, or cost paid to consultants, or freelancers.
    • Content Creation: For graphic designs, copywriting, photography, video production, etc.
    • Website & SEO: For website design, website management, SEO tools, email marketing, blog content, etc.
    • Public Relations: Influencer partnerships, media outreach, press releases.

     

    Staff Training

    This refers to the expenses incurred by a business to enhance employees’ skills, knowledge, and performance through formal or informal learning programs. It is designed primarily to maximize or boost business productivity, efficiency, and ensure employee satisfaction.

     

    Components of Staff Training Costs

    In practice, training costs may include:

     

    • External Training Fees: These are fees paid to training organizations, consultants, or online courses
    • In-house Training Expenses: These are expenses incurred for venue setup, training materials, or meals.
    • Travel & Accommodation: Offsite training expenses incurred on transport, lodging, and meals.
    • Software & Tools: For e-learning platforms, licenses, etc.
    • Certifications & Exams: Payment for registration, tuition, and professional exams such as ICAN, ANAN, ACCA, CIMA, etc.

     

    Meals & Entertainment

    These are expenses incurred by a business on food, drinks, and business related recreational activities, including client meetings, staff events, or networking activities. It should be noted that not all meals and entertainment are allowed for tax deductions. For this purpose, good record keeping and documentation should be maintained. Auditors may want to know who, why, when, how much, and the approval.

     

    Components of Meals & Entertainment

    • Client Meals: Lunch or dinner meetings with clients or prospects
    • Staff Meals: Staff lunch, meals during overtime, staff meetings, or training sessions
    • Business Events: Company retreats, end of the year party, product launch events, appreciation parties
    • Refreshments: Snacks, tea, or coffee for meetings
    • Entertainment Activities: Tickets for sporting events, shows, concerts for clients or business.

     

    Important Notice for Tax and Audit Purposes

    • Meals and entertainment must be business-related to qualify for tax deductions
    • Personal and extravagant spending is not allowed as business expense
    • The expenses incurred must be well documented. The receipts, purpose, and list of attendees should be provided for audit and tax purposes.

     

    Insurance

    This relates to premium paid by a business to an insurer for protection against specific risk or financial losses. It indemnifies the business against unexpected future events arising from fire, accidents, theft, or liability claims.

     

    Types of Business Insurance

    • Property Insurance: This covers loss or damage to buildings, equipment, inventory
    • Health Insurance: Medical coverage for employees
    • Life Insurance: Provides benefits to beneficiaries upon an employee’s death
    • Liability Insurance: Covers legal claims for injury or damage caused by the business to a third party
    • Professional Indemnity: This protects against claims of professional negligence

     

    Bank Charges

    These are expenses arising from financial transactions with banks. They are fees and commissions deducted by a bank from the account of a business for using its financial services. Bank charges must be reconciled regularly during bank reconciliations to ensure that bank statement and cashbook align.

     

    Common Types of Bank Charges

    • Account Maintenance Fees: Monthly or annual fee for running the account
    • Card Fees: Annual debit/ credit card maintenance charges
    • Transaction Fees: Charges for transfers, withdrawals, deposits, or cheque clearing
    • ATM Fees: Charges paid for using ATMs, especially from other banks
    • Loan Processing Fees: Cost incurred for setting up or managing loans
    • Foreign Exchange Fees: Charges incurred when conducting international transactions
    • SMS/ Alert Charges: Charges for transaction alerts via SMS or email

     

    Supplies

    These are consumable items used by a business in running the daily business operations. Generally, supplies are not required for sales but used in the day to day business activities. Examples include:

     

    • Office Supplies such as paper, pens, files, printer ink, envelopes
    • Cleaning Supplies, including soap, detergent, disinfectants, mops, brooms, buckets
    • Production Supplies like lubricants, gloves, rags
    • Canteen Supplies, including cups, spoons, disposable plates, tea, sugar.

     

    Maintenance and Repairs

    These are expenses incurred in ensuring that assets such as buildings, equipment, machinery, and vehicles are in good working condition. These expenses help in ensuring smooth business operations and extend the economic useful life of assets without materially enhancing their value or capacity. Examples include:

     

    • Building Maintenance e.g. painting, plumbing repairs, AC servicing, lighting fixes
    • Equipment Servicing, including generator servicing, fixing production machinery, calibrating tools
    • Vehicle Repairs, such as servicing, tyre replacement, brake repairs for company vehicles
    • IT Maintenance e.g. updating software, fixing computers, replacing parts.

     

    Depreciation

    This represents a reduction in the value of an asset over a given period arising from wear and tear, usage, or obsolescence. It is a systematic allocation of the cost of a tangible asset, including building, motor vehicle, equipment, etc over its economic useful life, using straight-line, reducing balance, or units of production methods. Depreciation is non-cash operating expense and reduces the book value of the non-current asset in the statement of financial position.

     

    Professional Fee

    This represents the payment made to an external expert or professional, including accountant, lawyer, IT specialist, engineer, architect, etc. for the services rendered to the business. The fee is a compensation to the professionals for their time, knowledge, expertise, and value they provided to the business. Professional fee should be properly documented to ensure compliance, transparency, and for tax purposes.

     

    Dues and Subscriptions

    These are fees paid by a business to professional bodies, industry associations, or publications to validate memberships, access resources, or receive services. Examples of due and subscription include:

     

    • Professional Memberships: ICAN, ACCA, ANAN, NSE, NBA annual membership fees
    • Industry Associations: Clubs, business chamber memberships, trade groups, regulatory bodies
    • Publication Subscriptions: Business journals, magazines, online news sites
    • Software Subscriptions: Accounting software (e.g., QuickBooks, Sage), research tools
    • Online Platforms: Training platforms such as Coursera, Udemy, LinkedIn Learning

     

    Gifts & Donations

    These are expenses incurred by a business for voluntary transfer of money or property without expecting anything of value in return. Usually, gifts and donations are given to employees, clients, communities, charities, or nonprofit organisations for the purpose of building goodwill, support social causes, or enhance relationships. Examples of gifts and donations include:

     

    • Employee giftsg. birthday gifts, retirement tokens, service awards
    • Corporate gifts such as hampers, branded souvenirs, or end-of-year gifts for clients or employees
    • Charitable donations, including contributions to schools, NGOs, religious bodies
    • Community Support such as scholarships, donations to local projects, disaster relief funds.

     

    Important Notice for Tax and Audit Purposes

    • The amount must be reasonable and well documented
    • Donations must be made to approved charitable organizations or bodies for tax purposes
    • Gifts to individuals, including employees, clients are not allowable tax deduction

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  • Understanding Bonds: A Practical Guide to Investors, Businesses, & Governments

    Understanding Bonds: A Practical Guide to Investors, Businesses, & Governments

    Bonds

    Meaning, Uses, & Practical Examples

    Bonds are one of the most powerful financial tools often underrated. It can be used by an individual seeking to earn stable income, a business wanting to raise capital, or a government needing funding for infrastructure. Bonds provide structured solutions with long-term benefits.

     

    What Is A Bond

    Bond is a fixed income instrument that is tradable in an organized financial market. It represents a loan made by an investor to a borrower (i.e. issuer) in return for a fixed interest payment  over a specified future date. The principal is repayable at the maturity date, depending on whether or not the bond is redeemable or irredeemable.

    Generally, bonds are issued by private individual, corporate, national, subnational, or supranational organizations for different purposes.

    Uses of Bonds

    Basically, bonds can be used for different purposes, including:

    • Funding Capital Expenditure
    • Capital Preservation
    • Hedging Against Risk Exposure
    • Earning Fixed Income
    • Funding Business Operations
    • Raising Capital for Investment Opportunities.

     

    The owner of the bond is called bondholder, creditor, or investor, while the issuer of the bond is called borrower. The bond price is highly sensitive to changes in interest rates. For instance, when the market interest rate increases, the bond price falls, and vice versa.

     

    How Bonds Are Used in Practice

    Let’s explore the practical ways in which bonds are used in real life by an individual, corporate, and government:

     

    How Individual Can Use Bonds

    Example: Retirement Planning

    Mr. Calafiori is a professional accountant retiring in 5 years’ time. He has decided to invest ₦5,000,000 in FGN savings bonds for the next 5 years at 14% interest per annum.

     

    From The Scenario Above:

    • Calafiori will earn annual interest of ₦700,000 (i.e. 14% x ₦5,000,000) for the next 5 years
    • Over the 5 years period, would have earned a total profit of ₦3.5 million
    • He has secure steady income while preserving his capital
    • This helps him to cover some of his living expenses as he transitions into retirement
    • At maturity, his initial investment of ₦5,000,000 will be repaid.

     

    How Companies Use Bonds

    Example: Project Expansion

    Eskoba Plc is a telecom company based in Ado-Ekiti, Ekiti State. The company’s board of directors agreed in the last meeting to expand their broadband infrastructure nationwide to enhance connectivity. The company does not want to issue additional shares to finance the investment due to dilution of ownership. Instead, it issues 9% ₦10,000,000,000 corporate bond. The bond will be redeemable at par in 5 years’ time.

     

    What Next:

    • Investors lend the company the finance required by purchasing the bond
    • Eskoba Plc will pay annual interest of ₦900 million (i.e. 9% x ₦10 billion) to the investors
    • At maturity i.e. after 5 years, the company will repay the principal amount

     

    From This Scenario:

    • The company get the required funding without losing control of the business
    • Investors earn predictable stream of income over the period of the investment.

     

    How Governments Use Bonds

    Example: Infrastructure Development

    The Federal Government of Nigeria (FGN) has concluded plans to build new roads and upgrade existing transportation infrastructure across the six geopolitical zones. The finance required of ₦550 billion to execute the project is not readily available. To raise the funds, FGN has decided to issue a 10-year sovereign bond at interest rate of 15%.

     

    What Next:

    • High-net-worth-individuals, retail, and Institutional investors subscribe to the bond.
    • FGN pays interest of ₦82.5 billion (i.e. ₦550 billion x 15%) every year to the investors (i.e. the bondholders) for the next 10 years.
    • FGN will repay the bondholders (investors) the principal of ₦550 billion after 10 years.

     

    From The Scenario Above:

    • The FGN is able to fund the intended project without having to raise taxes
    • Investors earn returns on their investment with relatively low risk.

     

    Read Related Articles

    In Summary

    Understanding bonds can enhance your financial decisions, irrespective of whether you are a professional planning for retirement, business owner wanting to invest idle funds to earn returns, or an investor interested in balancing portfolio mix. Bonds can be used as a wealth preservation strategy and funding capital expenditure, depending on the user.

    NEED EXPERT SUPPORT?

    At Greena Partners, we help individuals, corporate organizations, including public sector clients make informed investing decisions about bond, funding strategy, and financial planning. As finance professionals, it is our job to guide clients towards achieving a smart and well diversified investing choices.

    Need help understanding how bonds fit into your business strategy or financial goals?

     

    Let’s talk.👉 Contact us today to schedule a consultation. Our team of experts is here to guide you.

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  • Overtrading: How Rapid Growth Can Impair Liquidity

    Overtrading: How Rapid Growth Can Impair Liquidity

    Overtrading

    Overtrading Can Kill A Growing Business

    Overtrading, also known as undercapitalization, occurs when a company is trying to undertake a larger volume of trade or activities than it has financial capacity to do. A company is said to be overtrading when it grows rapidly than its cash flow can support. This can have serious financial repercussion for the business.

    Though, sales are booming; orders are flying in… It sounds good, but your bank account says otherwise. The business operations may be disrupted if your bank refuses to grant credit facilities or your major supplier insists you pay on cash.

    How Overtrading Can Impair Liquidity

    1. Inventory grows faster than cash
    • To satisfy customer demands, you acquire more inventories.
    • The inventory swallows up cash, and until sold and cash is received, liquidity suffers.

     

    1. Customers delay payments
    • Sales increase, but customers don’t pay on time and as a result, liquidity is trapped.
    • The book says the company is rich (on paper), but in reality, it is broke in the bank.

     

    1. Suppliers want their payments faster
    • Cash position will suffer if the number of days credit is taken from suppliers is shorter than the days credit is given to customers.
    • The shorter the gap, the more company will be under pressure to settle supplier.

     

    1. Borrowing to survive
    • Despite increased sales, you may borrow loan to pay salaries, rent, or acquire raw materials.
    • Borrowing increases interest costs, and worsening liquidity position.

     

    1. Exceeding overdraft facilities limit
    • Sales grows. Need cash to purchase inventory. You constantly exceed overdraft facilities limit agreed with the banks.
    • The business operations may be curtailed, if the bank facility is withdrawn.

     

     

    Warning Signs Your Business is Overtrading

    • Creditor payment period getting longer i.e. you are delaying payments to suppliers
    • Rapid growth in turnover, cash is constantly tight
    • Always borrowing to fund daily business activities
    • Struggling to satisfy customer demands or orders efficiently
    • Low liquidity ratio
    • Cash operating cycle is increasing.

     

    How To Prevent Overtrading

    • Ensure judicious and efficient management of working capital
    • Improve your cash flow projection
    • Avoid over-investment in inventory
    • Negotiate better credit terms with the suppliers
    • Shorten debtors collection period i.e. tighten your credit terms
    • Scale consistent with your working capital capacity
    • Avoid unnecessary debt
    • Seek professional advice.

    Read Related Articles

    In Summary

    Growth is great and sweet. But uncontrolled growth without working capital will lead to liquidity problem. In addition, failure to meet customer demands can lead to strained relationships with customers, vendors, or even employees, eroding the business reputation and impair its ability to take advantage of market conditions.

    Hence, effective and efficient management of the working capital investment is essential to maintaining and ensuring business continuity. Engage financial advisors to develop strategies for managing growth and preventing overtrading.

    NEED EXPERT SUPPORT?

    At Greena Partners, we help businesses like yours grow sustainably- with clear financial systems, robust cash flow planning, and actionable advisory support. Our team can collaborate with you to develop strategies to managing your working capital judiciously.

     

    Let’s talk.👉 Contact us today to schedule a consultation.

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  • Working Control vs Controlling Interest Explained

    Working Control vs Controlling Interest Explained

    Working Control Explained

    Working Control vs Controlling Interest: How They Impact Business Structures

    In accounting, finance, and corporate governance, many are familiar with the concept of controlling interest or significance influence, but not “working control”. Let’s explore each concept deeper with their key differences.

     

    In corporate finance or business, not all ownership is created equal. Hence, business owners, financial advisors, and investors must understand the levels of influence or control an investor has in a company. These relationships are essential to determining how businesses are run and how investments are reported in the financial statements.

    Working Control

    • Definition: This involves the ability to control the daily business operations or major decisions without having a majority shares. It occurs when a minority shareholder (or shareholders) has enough voting power to influence corporate policy. This usually happens when no single individual shareholder within the company possesses controlling interest.
    • Implication: A shareholder with working control will have practical control through influence (e.g., management structures, board seats, key executive appointments, voting agreements, etc).
    • Ownership Structure: Often between 20% and 50%, depending on the arrangements.
    • For Instance: Tolani owns 45% shares in Ezkoba Limited but controls the board majority and CEO of the company. In this case, Tolani has working control.

     

    Controlling Interest

    • Definition: This arises when an individual, a corporate, or group, acquires more than 50% voting power in another entity, giving the holder the legal right to control the company’s decisions.
    • Implication: The acquiring entity or individual has full control over financial, operations, and strategic decisions of the other entity.
    • Ownership Structure: Usually more than 50%.
    • For Instance: If a shareholder (Tolani) owns 55% of Ezkoba Ltd, Tolani has controlling interest and can appoint the board and dictate policy direction of the company.

     

    Significance Influence

    • Definition: This exists when an investor can participate in key financial and operating decisions but not control over them.
    • Implication: Can influence decisions but cannot enforce them.
    • Ownership Structure: 20% or more of voting power
    • For Instance: If Tolani owns 21% of Ezkoba Limited and has a seat on the board, Tolani is said to possess a significance influence.

    Key Difference

    Working Control

    This framework is particularly relevant for professional accountants, investors, business leaders, and decision-makers navigating corporate structures or preparing group financial statements.

     

    Why It Matters

    Understanding the degree of influence associated with the controlling interest, working control, and significance influence is essential for:

    • Investment Planning
    • Group Structuring
    • Accurate Financial Reporting
    • Tax & Regulatory Compliance

    NEED EXPERT GUIDANCE?

    At Greena Partners, we provide strategic financial management, investment structuring, and compliance advisory for Nigerian businesses. Whether you’re managing subsidiaries, forming partnerships, alliances, or evaluating investment opportunities, our team is available to guide you.

    👉 Contact us today to schedule a consultation.

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  • How Businesses Can Detect & Prevent Fraud

    How Businesses Can Detect & Prevent Fraud

    How Businesses Can Detect & Prevent Fraud

    How Businesses Can Detect & Prevent Fraud: Techniques | Strategies

    Fraud can be committed in any organization, big or small. Therefore, without proper controls mechanism, the business can suffer significant financial losses, reputational damage, and can lead to legal consequences. Fraud detection and prevention is essential to businesses and can be carried out in several ways, including regular audits, strong internal controls, cold eye reviews, behavioral red flags, whistleblower policies, etc. Below is how to effectively detect and prevent fraud in your business:

     

    Common Types of Fraud

    Basically, there are different kinds of fraud. However, the most common types include:

    • Financial Statement Fraud: Intentionally manipulating financial information to deceive or mislead shareholders and other stakeholders
    • Asset Misappropriation: Stealing of company assets, including cash, supplies, or inventories.
    • Payroll Fraud: Inflating hours worked, ghost employees, or fictitious/ false reimbursements
    • Supplier/ Vendor Fraud: Kickbacks, overstating invoices, or creating fictitious vendors
    • Cyber Fraud: Malware, phishing, data breaches, credit and debit card fraud.

    Fraud Detection Techniques

    Early fraud detection is vital to minimise financial losses and damage. The tactics below can be used:

    • Regular Internal Audits: Review transactions, books, and bank reconciliations regularly.
    • Cold Eye Reviews: Independent reviews of the books, project, process, and operation by third-party experts.
    • Segregation of Duties: Ensuring no individual has complete control over a task or process. Promoting checks and balances.
    • Behavioral Red Flags: Know your employees. Monitor employee that refuses vacations, unnecessarily close to customers/ vendors, or living above their means.
    • Data Analytics: Use accounting software to flag unusual patterns, e.g. duplication of vendor’s name, invoices, etc.
    • Whistleblower: Encourage anonymous reporting system.

     

    Strategies to Prevent Fraud

    To prevent fraud in your business, adopt the following strategies:

     
    Develop Sound Internal Controls System
    • Delegation of authority
    • Approval threshold and workflows
    • Multiple signatures for payments
    • Restricted/ limited access to cash and financial systems
     
    Regularly Train Employees
    • To recognize and report fraud
    • On company’s policies, guidelines, code of conduct, and procedures.
     
    Conduct Background Checks
    • For new hires and vendors
     
    Regularly Update Company Policies
    • Standard of business conduct, fraud policy, business guidelines and procedures.
     
    Integrate Evolving Technologies
    • Monitor logins and data access
    • Restrict download from external sources
    • Enable alerts for unusual transactions
     
    Establish Fraud Risk Management Framework
    • Develop a comprehensive organizational framework for managing and mitigating fraud risk.

     

    Identity Verification
    • Implement robust identity verification processes to ensure the authenticity of transactions, employees, vendors, and visitors.

     

    Organizational Culture Matters

    Management must demonstrate high level of responsibility and leadership by setting good example:

    • Lead by example. Set the tone from the top by walk the talk.
    • Encourage employees that demonstrate high ethical value for integrity, transparency, and good professional behavior.
    • Reward candor and accountability.

     

    Things To Do If You Suspect Fraud

    When you suspect any fraud in your business, act carefully:

    • Do not confront the suspect directly
    • Get your fact. Secretly gather your evidence, documents, logs, transaction history, etc.
    • Engage a professional e.g. forensic accountant or legal adviser.
    • If necessary, report to authorities, e.g. Police, EFCC, etc.

    In summary

    Fraud detection and prevention require proactive measures, including smart technology, strengthening internal controls system, and embracing company-wide culture of integrity. Hence, as fraudsters are becoming more sophisticated, it is critical for businesses to start building a stronger defensive tactics today to secure their companies for tomorrow.

    WORRIED ABOUT FRAUD RISKS IN YOUR BUSINESS?

    Contact us today to schedule a free Fraud Risk consultation (info@greenapartners.com)

    HOW BUSINESSES CAN DETECT & PREVENT FRAUD

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  • Understanding PAYE- A Complete Guide for Employers & Employees

    Understanding PAYE- A Complete Guide for Employers & Employees

    PAYE Tax

    Understanding PAYE TAX: A Complete Guide for Employers & Employees

    Understanding PAYE (Pay As You Earn) tax system in Nigeria is essential to staying compliant and avoiding penalties as an employer or employee. PAYE is a form of personal income tax (PIT) that is deducted from the source by the employers from the salaries of their staff and remitted to the state inland revenue service (SIRS) of the employees’ principal places of residence. In this guide, we dissect everything you need to know about Pay As You Earn tax in Nigeria.

    WHAT IS PAYE?

    This is a system of tax in Nigeria where income tax is deducted from employees’ salaries or wages by the employers before they are paid. It is governed by the Personal Income Tax Act (PITA). In this scheme, employers are considered the agents of the government for tax collection purposes. The law requires employers to deduct tax from employees’ monthly income and remit same to the relevant tax authorities, usually the SIRS.

     

    WHO PAYS PAYE TAX?

    Any employee in private or public sector, who earns income from employment through salaries, wages, bonuses, allowances, etc. are liable to PAYE.

     

    RELIEFS/ DEDUCTIONS

    An employee is entitled to deduct the following from the gross income before arriving at the taxable income:

     

    1. Consolidated Relief Allowance (CRA): higher of ₦200,000 or 1% of gross income, plus 20% of gross income.
    2. Pension Contribution: 8% of Basic, Rent, & Transport (BRT).
    3. National Housing Fund (NHF), Life Assurance, National Health Insurance Scheme (NHIS), Gratuities, etc.

    GRADUATED TAX RATES

    The rates below shall be applied on the taxable income to arrive at the PAYE tax payable:

    Graduated Tax Rates

    WHO’S RESPONSIBLE TO REMIT PAYE?

    The employer is required by law to deduct and remit PAYE on behalf of the employee, to the State Inland Revenue Service (SIRS) where the employee resides.

     

    EMPLOYER’S OBLIGATIONS

    An employer in Nigeria is required by law to:

    1. Register for PAYE with the SIRS where the employee resides
    2. Deduct PAYE monthly from employee’s earnings
    3. Remit the tax deducted to the relevant tax authorities
    4. File monthly PAYE returns (Form H1)
    5. File annual PAYE returns (Form A)
    6. Keep PAYE records and tax details of employees.

    Failure to comply with the applicable laws can attract penalties, interest, and reputational damage.

     

    DEADLINE FOR FILING OF PAYE

    • Monthly Returns: on or before 10th day of the month following deductions (for example, March 2025 deduction is due for filing on the 10th of April 2025)
    • Annual Returns: not later than 31st January of the following year.

    OFFENCES & PENALTIES

    PITA Cap P8 LFN 2004 as amended, provides for the offences and the underlying penalties as follows:

    Tax Offences & Penalties

    COMMON PAYE COMPLIANCE MISTAKES

    These include:

    • Late remittance of PAYE
    • Incorrect application of reliefs and deductions
    • Failure to register with SIRS in multiple states
    • Incomplete or inaccurate returns

     

    CASE STUDY (Worked Example)

    Let us assume you are provided with the following information relating to an employee of Eskoba Limited:

    1. Name: Audu Chike Adeola
    2. Monthly Salary N600,000
    3. Basic, Rent, & Transport Allowance N500,000
    4. Annual Gross Income: N7,200,000
    5. Consolidated Relief Allowance N1,640,000 (i.e. N200,000 plus 20% of N7,200,000)
    6. Pension N480,000 (i.e. 8% x N500,000 x 12Months)
    7. Total Reliefs N2,120,000 (i.e. N1,640,000 + N480,000)
    8. Taxable Income N5,080,000 (i.e. N7,200,000 – N2,120,000)

     

    What is the monthly PAYE tax payable?

    Monthly PAYE Tax Calculation

    PAYE TAX COMPLIANCE TIPS

    • Automate your payroll by using reliable payroll software that incorporates Nigerian PAYE rules.
    • Stay connected with tax regulatory changes. Constantly checking FIRS and SIRS websites for update.
    • Keep records of all remittances, returns, and communication with tax authorities.
    • Engage the service of tax professionals for accurate calculations and filing of returns.

     

    IN SUMMARY

    PAYE is a critical aspect of Nigerian tax system. Hence, it is essential that both employers and employees understand how it works to ensure total compliance. Irrespective of the size of your organization (large or small), staying on top of PAYE deductions and remittances can help you build trust with the relevant tax authorities and avoid unnecessary penalties.

    NEED HELP WITH PAYE TAX COMPLIANCE?

    At Greena Partners, we specialize in helping businesses across Nigeria manage their PAYE tax responsibilities. Whether you need help with payroll setup, monthly filings, or staff training, our tax professionals are here to support you.

    Contact us today to schedule a free consultation (info@greenapartners.com)

    Understanding PAYE Tax

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  • Transfer Pricing by Multinational

    Transfer Pricing by Multinational

    Greener Partners

    Multinational Transfer Pricing

    Transfer pricing is the monetary value attached to the goods or services exchanged between divisions or subsidiaries under common control. Whereas the international transfer pricing represents the pricing of goods, services, and intangibles between connected parties in an organization across international boundaries. It is a strategy usually adopted by companies especially multinationals, to redistribute resources between the parent and subsidiaries or affiliates to reduce tax burden.

     

    Transfer pricing is an essential consideration for multinational entities when conducting transactions between parent and subsidiaries located in different countries. Transfer pricing provides many benefits to companies, particularly those with foreign operations.

     

    Oftentimes, companies manipulate or falsify records to avoid taxes. In some cases, companies can lower their costs when transacting with connected parties to avoid tariff on goods and services exchanged. The relevant tax authorities are aware of these sharp practices by companies and that is why their records are usually subjected to thorough scrutiny.

    Significance of International Transfer Pricing

    Some importance of international transfer pricing include:

     

    Tax Optimization

    Generally, transfer pricing affects the distribution of income between countries, and this usually impact the global tax burden of the multinationals. However, complying with the transfer pricing regulations can help companies to minimize the risk of double taxation and optimize tax burden.

     

    Regulatory Compliance

    To prevent tax base erosion and profit shifting (BEPS), including the need to ensure that transfer pricing is fairly determined to reflect the market price, regulatory authorities around the world and Organisation for Economic Co-operation and Development (OECD) have specific rules and regulations in which multinationals must complied with. Complying with these specific rules and regulations can make companies avoid compliance risk.

     

    Profit Allocation

    Transfer pricing is used for resource allocation between connected entities involving international transactions. This usually determines the profit attributable to the multinational, and in effect, its financial performance.

     

    Key Components of International Transfer Pricing

    Basically, the international transfer pricing usually involves:

     

    Goods

    This represents transfer of physical products between connected parties having a common control i.e., within an organization.

     

    Services

    This involves managerial, technical, and administrative services exchanged between the parent and its subsidiaries, or affiliates.

     

    Intercompany Loans and Advances

    This relates to financial arrangements between the parent company and its subsidiaries.

     

    Intangibles

    These include intellectual property, trademarks, patents, franchise, and brand values exchanged between the parent and its subsidiaries.

     

    Methods of Transfer Pricing

    Consistent with the dictate of (OECD), the following are major transfer pricing methods, including:

     

    Comparable Uncontrolled Price (CUP) Method

    This represents one of the most popular transfer pricing methods in the determination of arm’s length prices to be used between connected parties. This method compares the price charged between related parties for goods or services in a comparable uncontrolled transaction. The CUP method is generally used in arm’s length principle where sufficient data is available. It is easy to apply and mostly preferred by many tax authorities.

     

    Resale Price Method

    Under this method, the transfer price to be used between related parties is the resale price to an independent entity less gross profit margin for the goods purchased from a connected party for resale.

     

    Cost Plus Method

    Consistent with the arm’s length principle, transfer price is determined by adding an appropriate markup to the total cost incurred on the supply of goods or service in a related party transaction.

     

    Transactional Net Margin Method

    This involves comparing the net profit margin in a controllable transaction with the net profit margin in comparable uncontrolled transaction. It examines the net profit margin relative to an appropriate base involving assets, sales, and costs, that a taxpayer earns from a controlled transaction.

     

    Profit Split Method

    This method identifies the combined operating profit or loss to be allocated between related parties in a controlled transaction, by referencing the value contributed by each participant to earn the profit.

     

    Regulatory Framework

    The Organisation for Economic Co-operation and Development (OECD) provides detailed guidelines on transfer pricing. The guidelines emphasized the need to utilize the principle of arm’s length transaction between connected parties. This principle ensures that transactions between related companies are valued at market prices.

    OECD also provides initiative through BEPS to address the tax avoidance scheme usually adopted by entities to exploit loopholes and mismatches in tax regulations between countries. This ensures that transfer pricing aligns with the value creation system, and that there is transparency in country-by-country reporting (CbCR).

    In addition, local tax authorities have specific rules and regulations that govern transfer pricing. In Nigeria, transfer pricing is regulated by the existing tax laws, including Income Tax (Transfer Pricing) Regulations 2018.

     

    Challenges and Considerations

    There are plethora of issues facing transfer pricing practices, and some of which include:

    Documentation: Transfer pricing transactions requires detailed documentation to support the judgment and policies adopted, especially during tax audits. These documents are usually subjected to thorough investigation to ensure that the right tax is paid.

    Complexity: Generally, transfer pricing involves multiple jurisdictions with specific rules, regulations, and interpretations. Therefore, the ability to navigate through all these can pose a daunting task.

    Disputes: Oftentimes, transfer pricing can lead to disputes between tax authorities of different jurisdictions, resulting to double taxation or litigation.

    Risk Management: Having the right expertise to develop robust transfer pricing policies to manage compliance, financial, and reputational risks can be challenging.

    Economic Changes: The prevailing market conditions, exchange gyrations, and unstable economic environments can have far-reaching effect on the transfer pricing strategies.

     

    Best Practices

    The following are some of the transfer pricing best practices that can be adopted by companies:

    Documentation: Companies should maintain up to date and detailed documentation to support transfer pricing policies and practices.

    Review: The transfer pricing policies should be regularly reviewed to reflect the prevailing market conditions and regulatory changes.

    Benchmarking: The transfer pricing policies and decisions should be consistent with the industry standard and that of the comparable companies.

    Professional Expertise: Companies should engage professionals endowed with transfer pricing expertise to help navigate tax intricacies and international regulations.

    Advanced Pricing Agreement: Align or enter into agreement with the relevant tax authorities to obtain certainty on transfer pricing methods to avoid future disputes.

     

    Ethical Issues in Transfer Pricing

    Transfer pricing often involves ethical issues that bother around abuse and manipulation of records by multinational enterprises (MNEs), and which can negatively impact the economic and social welfare of a country. Some of the key ethical issues include:

    • Tax Avoidance and Evasion
    • Economic Inequality
    • Fairness and Equity
    • Transparency and Accountability
    • Corporate Social Responsibility
    • Legal and Regulatory Challenges

     

    Tax Avoidance and Evasion

    Companies can manipulate transfer prices to achieve a targeted goal. For instance, multinationals can use transfer pricing to shift profits from countries with high tax rate to jurisdictions with lower tax rate to reduce their overall tax burden. This practice may seem legal, but it deprives countries of their benefits from tax revenue. In addition, when multinationals allocate profits to jurisdictions with favourable tax rates (i.e., tax havens), there will be tax base erosion in the countries where significant economic activities occur, thereby limiting their ability to fund public projects.

     

    Economic Inequality

    Shifting profits from countries with higher tax rates to tax havens can worsen economic inequality of the countries because resources available to fund social programs, infrastructure, and public services may be inadequate. Also, developing countries who often rely heavily on tax revenues can be disproportionately impacted by aggressive transfer pricing practices, impairing their ability to reduce poverty and develop as a nation.

     

    Fairness and Equity

    There is huge disparity between SMEs and MNEs, since the SMEs do not have the requisite resources to engage in sophisticated transfer pricing strategies, resulting in an uneven playing ground. Also, local businesses may face higher effective tax rates relative to companies that engage in international transfer pricing, which give undue advantage to MNEs over the local companies.

     

    Transparency and Accountability

    Companies can intentionally make transfer pricing practices to be opaque and complex in order to make it difficult for relevant tax authorities to understand and scrutinize the financial records of the MNEs. At times, lack of, or inadequate disclosures in financial reporting and intercompany transactions can limit the ability of the tax authorities to hold MNEs accountable for their transfer pricing practices.

     

    Corporate Social Responsibility (CSR)

    In addition to legal compliance, ethical business practices encompass honesty, fairness, and positive contribution towards to the society. Engaging in aggressive transfer pricing practices can undermine the CSR efforts of MNEs and impair their reputation.

     

    Legal and Regulatory Challenges

    MNEs usually exploit gaps and mismatches in different tax jurisdictions in relation to transfer pricing. As a result, enforcing compliance may be challenging. Also, ethical issue can occur when MNEs encounter double taxation due to tax disputes between tax authorities of different jurisdictions, resulting in lawsuits and strained international relations.

    In Summary

    International transfer pricing is a challenging but essential aspect of multinational operations. It requires careful consideration, detailed documentation, and strategic planning to maximize tax gains and ensure compliance. Transfer pricing practices are used by the MNEs to deprive home country of their benefit of tax revenue through Base Erosion and Profit Sharing (BEPS). The OECD and local tax authorities have enacted regulations to prevent the abuse and manipulation arising from BEPS and other activities. Complying with these regulations will help companies to minimize double taxation and compliance risks.

    At Greena, we pride ourselves with highly experienced and committed professionals willing and ready to collaborate with businesses to create value

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    info@greenapartners.com

    +234 (0) 901 610 3132
     

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    74 Ogunnusi Road, Ojodu Ikeja, Lagos

  • Corporate Failure: Meaning | Causes | Symptoms

    Corporate Failure: Meaning | Causes | Symptoms

    Greena Partners

    Corporate Failure: Meaning | Causes | Symptoms

    In the past years, many prominent companies including Arthur Andersen, Bata, Delta Airlines, Dunlop, Enron, Kodak, Marks & Spencer, Nigeria Paper Mills, Nokia, Savannah Bank, Société Générale, etc have all experienced failure. While some failed partially, some experienced corporate disastrous end. Corporate failure is not something palatable, and every worthy organizational leader will strive to avoid it. Any corporate action that may threaten the going concern of a business, erode its corporate image, or result in a dramatic end should be avoided.

    Corporate failure represents the discontinuation of company’s operations occasioned by weak corporate governance, incompetence, and bad investment strategies, leading to inability of the company to earn sufficient inflows to offset operating expenses. It occurs when a company becomes bankrupt and goes out of business. In a business environment, corporate failure is quite common, but only those businesses with working governance system and that are adaptable to market changes, do survive the storm. However, it is noteworthy to mention that most corporate failings are self-induced and internally orchestrated.

    Causes of Corporate Failure

    Corporate failure can be caused by several factors including:

    • Management Incompetence
    • Economic Distress
    • Weak Corporate Governance
    • Technological Innovations
    • Bad Investment Decisions
    • Poor Working Capital Management
    • Poor Infrastructural Facilities
    • Regulatory & Political Environment etc.

    Management Incompetence

    This is a direct consequence of lack of collaboration, experience, managerial skills in relation to strategic thinking and capability. It is occasioned by the inability of the management team or the board to demonstrate the requisite leadership, vision, and expertise to pilot the affairs of the organization. It also implies weak management control over the workings and effective coordination of business activities. When the organizational leadership team is poorly structured, it may result in a situation whereby people or individual within the organization are allotted positions where they are incompetent. Poor leadership team can produce toxic working atmosphere, demotivated workforce, and hence may threatened the going concern of the business.

    A working leadership team recognize their areas of shortfall and quickly respond to fill the gap. They create a conducive working environment that motivate, attract, and enable employees to develop creative and innovative ideas to solve business problems. They also empower their people through relevant trainings in evolving technologies to enable them initiate novel ideas to discover new markets and improve market competitiveness.

     

    Economic Distress

    Globally, during the period of economic downturn, some businesses may fail and unable to rise again. The decline in the economy may lead to the reduction in the volume of activities, which may adversely affect the performance of many companies. During this turbulent period, companies usually find it difficult to operate at a level that will enable them to maximize returns to offset their financial obligations as they become due.

    Bad economic conditions usually incapacitate and impair the ability of companies to generate increasing revenue. Because it creates a situation that is not within their immediate control and hence, render many companies helpless. You can imagine the level of financial wreckage occasioned by the economic meltdown of 2008 when billion-dollar investments were lost to market crash. The COVID-19 pandemic took everybody by surprise in the year 2020 when the global business was lock down for several months.

     

    Weak Corporate Governance 

    This is triggered by lack of board effectiveness, unhealthy company culture, inappropriate incentives, board’s risk blindness arising from skills limitations and competence, and the inability to effectively monitor and control senior executives. When the corporate governance system of a company is weak, things will be done anyhow. There will be no proper coordination of affairs of the business, resulting from poor leadership. The internal controls system will be very weak and lack the requisite capacity to adequately check frauds, financial leakages, and other irregularities. Weak corporate governance generally results from the board of directors saddled with oversight responsibilities, but with little or no experience in the core business areas.

     

    Technological Innovations

    The importance of technology in today’s business cannot be overemphasized. The 21st century businesses require digital transformation to be competitive in the marketplace. Technological tools can be integrated to improve operating efficiency, promote corporate image, and generate increasing revenue. Many aspects of our lives are now interconnected with online activities.

    Therefore, succeeding in digital age required considerable knowledge in evolving technologies including artificial intelligence, machine learning, big data analytics, internet of things etc. However, integrating the requisite technology and keep maintaining the system will require high level of expertise and technically skilled professionals. Hence, if a company fails to leverage on evolving technologies, it may become laggard in the industry and unable to outperform its competitors, and its ability to remain in business may be significantly impaired.

     

    Bad Investment Decisions

    Company’s previous bad investment decisions that failed to yield the anticipated returns can also result into corporate failure, especially where significant amount is involved. Companies borrowed funds to finance investment opportunities with the expectation that the project will generate sufficient cash flows and superior returns in excess of its cost. If the investment fails, and the company is unable to settle its financial obligations, it may result in dilution of ownership and control. Then the going concern of the company may become threatened.

     

    Poor Working Capital Management

    Working capital is the difference between current assets and current liabilities. It is the amount required for the day to day running of a business. Whereas working capital management represents the efficient and judicious management of each component of current assets and current liabilities including inventory, account receivable, cash, prepayment, account payable etc. to ensure liquidity of a company. The essence of working capital management is to ensure that sufficient cash flow is available to meet short-term financial obligations (liquidity).

    Cash is regarded as the most liquid asset of any organization. Hence, companies should maintain adequate cash level to meet the day-to-day running of the business. The cost of running out of cash may be damaging to the business including not being able to pay debts as they become due. And if a company consistently fails to pay its bills as they fall due, it can have serious operational repercussions and its ability to operate on a going concern basis may be impaired.

    Therefore, efficient working capital management will guarantee smooth financial operations and help improving earnings and profitability of a company. Excessive investment in working capital should be avoided. Rather, such idle funds should be invested in short-term marketable securities to generate additional returns.

     

    Poor Infrastructural Facilities

    Poor infrastructure, epileptic power supply, widespread insecurity, lack of good transportation system, etc. usually create additional and increasing costs for companies, especially in developing countries. When the costs become unbearable, companies may decide to close the business or migrate to another country where all these facilities are readily available.

     

    Regulatory & Political Environment

    Frequent change in regulation including multiple taxation, inadequate access to finance, inconsistent government policies etc. can propel companies, particularly the multinational organizations, to withdraw their investments when the operating business environment become unfavorable. Also, political turmoil, militancy, banditry, insurgency, etc. may threatened the corporate existence of a company. These factors impact on the company negatively beyond the control of its management and hence, the inability to continue business on a going concern basis.

    Symptoms of Corporate Failure

    Corporate failure did not occur overnight. The signs are always there. But it requires the management’s ability to identify and put in place mitigating measures to prevent its occurrence. The following are some of the red flags or symptoms of corporate failure:

    • Low Profitability
    • High Gearing
    • Low Liquidity
    • Declining Sales and Loss of Market Share
    • High employee turnover

     

    When a company is struggling to pay its debt as they become due, or the financial performance of the organization is on a downward trend year on year, or when profitability ratios such as return on capital employed, profit margin, or return on asset are constantly declining, it is a red flag to corporate failure and action should be taken as immediate as practicable to avoid a corporate catastrophic outcome.

    At Greena Partners, we help businesses develop robust governance system to tighten leakages and improve performance.  We can collaborate with you to design requisite strategies to preclude corporate collapse.

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  • Financial Statement Fraud

    Financial Statement Fraud

    Greena Partners

    Financial Statement Fraud

    Financial statement fraud occurs when a company intentionally manipulates financial information to deceive or mislead shareholders, investors, lenders, and other users of the general purpose financial statements.

    Aggressive accounting, that is, choices that are designed by management to enhance a company’s financial performance and position, by inflating revenue, earnings, and other reported operating cash flows, or by decreasing the amount of expenses or debts in a reporting period, can threatened the going concern of a business if not nip in the bud.

    This kind of fraud can have severe consequences for organizations, leading to damaged reputation, financial losses, and even legal repercussions. Understanding common methods of financial statement fraud, as well as implementing effective detection and prevention measures, is crucial for maintaining the integrity of financial reporting.

    There are several methods usually employed by companies to commit financial statement fraud. Some of which are set out below:

    1. Revenue Manipulation
    2. Overstating/ Understating Expenses
    3. Improper Asset Valuation
    4. Concealing Liabilities
    5. Fraudulent Disclosures
    6. Round-Tripping
    7. Related Party Transactions
    8. Timing Differences
    9. Manipulating Reserves and Accruals
    10. Corruption

    Revenue Manipulation

    Companies undertake several methods of perpetrating revenue fraud. Revenue can be artificially inflated by recording sales that have not been earned or recognising revenue prematurely. A fictitious trade receivable can be manufactured to create artificial sales. At times, companies inflate trade receivables in order to increase revenue. In addition, companies can record fictitious sales, or record revenue when risk and reward incident to the goods or services have not been transferred to the customers.

     

    Overstating/ Understating Expenses

    Expenses can be manipulated to achieve a predetermined objective. Management can increase expenses arbitrarily in order to reduce the company’s tax liabilities. For example, directors’ remuneration, marketing expenses, etc., can be inflated to achieve a lower profit, and in effect, resulting in a lower tax been paid. On the flip side, management can intentionally understate expenses by undercharging depreciation or any other specific expense line items to achieve high profit margin to mislead investors. Other methods include to defer legitimate expense to the next reporting period, capitalizing expenses, etc., all in a bid to increase reported profit.

    Generally, companies engage in creative or gymnastic accounting practices by cooking or making their books appear so rosy than necessary to deceive investors. Though, the tax authorities are aware of these sharp practices, and that is why a company’s audited financial statements is being subjected to thorough scrutiny during tax audit.

     

    Improper Asset Valuation

    The valuation of assets in the statement of financial position can be materially manipulated to achieve intended results. Assets such as properties, plant, and equipment, goodwill, including inventories can be overvalued to misrepresent the company’s  financial position. For instance, when inventories are overvalued, the reported profit will be lower, and in effect, a lower tax liability will be paid. Misleading asset valuation can also arise when a company intentionally fails to write down impaired assets to their recoverable amount in consonant with the dictate of IAS 36 on impairment of assets.

     

    Concealing Liabilities

    Companies can omit or understate liabilities in order to present a healthier financial position in a particular period than they actually have. Concealing liabilities can arise when an entity’s management fail to disclose off-balance sheet items including operating leases or contingent liabilities. It can also occur when account payables are understated, or improper recording of warranty costs and loan covenants are carried out in the books.

    At times, companies’ management can use “big bath” technique to manage their earnings by conducting a one-time write-offs in a reporting period to enhance future profit. Big bath is an unethical behaviour usually carried out by a company’s top level management when they realised that they cannot achieve the minimum earnings target in a given period. The management can then delay revenue realization, create big write-offs, or making prepay expenses in order to get big bonuses in the near future.

     

    Fraudulent Disclosures

    The information provided in the financial statements must be accurate, faithfully represented, and devoid of any ambiguity to enable users make informed business and investing decisions. Fraudulent disclosures involves intentional manipulation of facts by providing misleading or false information in the financial statements. Companies can omit material information, making overly optimistic estimates, or misrepresenting the nature of transactions or financial arrangements with third parties. To achieve an intended result or objective, information relating to contingent liabilities, related party transactions, accounting changes, or any material events, can either be obscured or omitted entirely in the financial disclosures or footnotes.

     

    Round-Tripping

    This is a fraudulent activities usually conducted between related entities where money is exchanged to create the appearance of a legitimate business transaction, where in reality, it is fake. This fraudulent act is usually perpetrated by the management to artificially inflate revenue, create fictitious transactions, or manipulate the financial information to mislead shareholders, investors, government, and other users of the financial statements. Generally, engaging in round-tripping can result in lawsuits, impair a company’s relationships with relevant stakeholders, and significantly damage its reputation once uncovered.

     

    Related Party Transactions

    Though, not necessarily a mechanism for fraud, but companies, including multinational entities, can use related party such as subsidiaries, affiliates, or their executives to perpetrate financial fraud. This is particularly possible when assets, goods, or services are exchanged between related parties at inflated prices. Contract prices, loan agreement, leases, and service agreement  between related entities can be manipulated to distort financial results. Because of potential conflict of interest, auditors, or regulatory authorities usually subject related party transaction to thorough investigation.

     

    Timing Differences

    This involves recording revenue or expenses inappropriately in different periods. Revenue or expenses can be shifted from one period to another in order to achieve a targeted or predetermined earnings. For example, if a company wants to report high profit in a particular period, it can delay closing of books to enable more sales to be generated or allow customers’ invoices to be paid before the books are finally closed for the reporting period or month.

     

    Manipulating Reserves and Accruals

    Companies can manipulate reserves and accruals, including warranty reserves, provision for doubtful debts to smooth earnings or create the appearance of financial stability.

     

    Corruption

    This involves conflict of interest, bribery, kickbacks, contract inflation, selling of proprietary information, economic extortion, money laundering, etc., often perpetrated by company’s management or its official in collusion with third parties.

    In Summary

    Financial statement fraud is usually carried out among company directors, employees, and sometimes require collusion with external parties, including auditors, consultants, or vendors. Hence, detection of this kind of fraud will require careful analysis of the financial statements using relevant tools to identify unusual or inconsistent patterns in transactions. Independent verification of key financial metrics may be carried out to spot irregularities.

    Engaging in financial statement fraud have dire consequences for organizations. It can result in financial losses, lawsuits, or erode the company’s reputation. Consider the scandals, and disastrous end of Enron, WorldCom, Wirecard, etc. Understanding ways by which financial statement fraud are been committed, including putting in place, effective detection, and prevention measures, can protect the integrity of financial information and enhance investors’ confidence.

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  • Key Factors That Influence Share Prices

    Key Factors That Influence Share Prices

    Key Factors That Influence Share Prices

    Key Factors That Influence Share Prices

    Share price represents the economic worth of a company’s shares. It is the amount at which a company unit share can be traded in an organized financial market. These share prices are determined by several internal and external economic factors, including market conditions. Though, investing in shares can be a very profitable venture but need critical evaluation to avoid the risk of financial losses. The stock market is highly volatile and can make the share prices susceptible to market gyrations. This is because a single misstep can result in disastrous financial outcome for an investor.

     

    Outlined below are some of the factors that influence share prices:

    Company Fundamentals (Financials)

    The performance of a company in terms of top-line and bottom-line growth, profit margins, earnings before interest, tax, depreciation, and amortization (EBITDA), earnings per share (EPS), dividends, and overall financial wellbeing can have material effect on the determination of a company’s share price. The fundamentals have the capacity to influence investors’ sentiment positively or negatively in relation to a company’s share prices. A rational investor will seek to maximize returns where possible. Therefore, a company with a weak financial performance will not be able to attract investors, leading to a fall in its share prices. Generally, rational investors have propensity to acquire shares in a company with exceptional performance. This will increase demand for a company’s shares, leading to an increase in its share prices.

     

    Demand and Supply

    The demand and supply dynamics can significantly influence the share prices of a company. When there is high demand for a company’s shares arising from strong financial performance, positive news about the company, favourable industry trends, or perceived stock underpricing, the share prices will tend to increase. However, when the number of shares available for sale in the market is more than the unit of shares demanded by investors, the share prices will drop. Generally, the events such as insider selling, share buybacks, stock issues, initial public offering, or secondary offerings can put pressure on a company’s share prices.

     

    Industry Performance

    The performance of the industry where a company operates can affect its share price. A rapidly growing industry can attract positive sentiment from investors group, which can significantly enhance a company’s share prices. A sector with a bad reputation cannot command any positive influence from the market. Hence, the share prices of the companies operating in such sector may not be attractive.

     

    Market Sentiment

    The overall attitude, mood, or psychology of investors about a company’s shares can affect its share prices. Factors such as market speculation, rumours, investor perceptions, etc. can significantly influence a company’s share prices. Specifically, when the market sentiment is bullish, the share prices rise, whereas a bearish market sentiment indicates a declining share prices.

     

    Economic Factors

    The macroeconomic indicators of a country, including GDP growth, interest rates, inflation rates, unemployment, etc. can have material effect on the companies’ share prices. Strong economic indicators can enhance investor confidence, leading to increased share prices. In addition, a stable economy has the tendency to attract foreign direct investments, leading to high demand for companies’ shares, and hence increase in share prices. Whereas a country with a troubled economy will discourage foreign direct investment investments, and the existing investors may sell-off their shares, resulting in a fall in share prices.

     

    Monetary Policy

    The central bank decisions or actions about interest rates can affect countrywide economic activity, borrowing costs, consumer spending, purchasing powers, etc. This  can materially influence the share prices. If the policies announced by the central bank is favourable to investors, the market sentiment will be positive, and share prices will tend to increase. But unfavourable policies can erode investor confidence, which may prompt sell-off, and in effect, declining share prices.

     

    Regulatory Changes

    Changes in government policies or regulations can affect a particular industry or industries, leading to a change in companies’ share prices. For instance, an increase in companies’ income tax rates can affect all companies operating within an economy, which may lower earnings, and in effect, the share prices. Contrarily, if government decides to reduce companies tax rates, earnings will increase, which will boost the share prices.

     

    Geopolitical Risks and Global Events

    Investors will always avoid any country with a turbulent political environment to minimize financial risk. The events such as war, natural disasters, geopolitical tensions, or global economic crises can create uncertainty in the financial markets leading to gyration in share prices.

    In Summary

    Generally, share prices are determined by the market forces of demand and supply. This is because when demand for a company’s shares exceeds supply, the share prices increase because investors are willing to pay higher prices to buy shares. On the other hand, when supply of shares exceeds demand, the share prices tend to decline as the sellers compete to find willing buyers at lower prices. It is essential to note that these factors are interrelated in the determination of share prices.

    In addition, the investor sentiment and perceptions, particularly the dynamics of demand and supply can significantly influence share prices based on the fundamental factors.

    Therefore, before making your next investing decision, it is judicious to consider these factors to have better understanding of how the stock market operates. Developing investment strategy can also help you to identify new opportunities and potentially profit from share price movement, especially if the shares are undervalued.

    Here, are some factors to consider before investing in shares

    If you need financial advice, kindly reach out to us at Greena Partners. Our advisory team are available to collaborate with you to provide a unique and requisite support towards making your smart investing decision.

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  • Recapitalization: Upside | Downside

    Recapitalization: Upside | Downside

    Greena Partners

    Recapitalization: Upside | Downside

    On March 28, 2024, the Central Bank of Nigeria (CBN) rolled out a circular on the review of minimum capital requirements for commercial, merchant, and non-interest banks. To satisfy the minimum requirements, banks are provided with several options, including:

    1. Introducing additional capital through right issues, private placement, and/ or offer for subscription
    2. Engaging in business combinations through merger and acquisition (M&A)
    3. Upgrade or downgrade license authorization/ category.

    Minimum Capital Requirement

    The new minimum capital requirements of banks as unveiled by the CBN are shown in the table below:

    Minimum Capital Requirement

    Time Frame

    All the banks are given two (2) years to comply with the recapitalization exercise, effective April 01, 2024, and ending March 31, 2026.

    Specifically, the apex bank requires that the new minimum capital must be raised through paid-up capital and share premium only for existing banks, and paid-up capital only for proposed or new banks.

    In addition, all banks are required to submit to the Director, Banking Supervision Department of CBN, not later than April 30, 2024, of their implementation plans on the chosen option (s), and how they intend to meet up with the requirement, including their specific timelines.

    Implications

    Bank recapitalization involves the process of enhancing the capital structure of a bank by introducing additional capital. This usually has some upside and downside effects. Thus, outlined below are some of the possible implications of the recapitalization exercise include, but not limited to:

     

    Upsides of Recapitalization:

    Close monitoring and Supervision:

    Recapitalization ensures there is proper scrutiny and supervision over banks’ activities by the regulatory authorities. This will enable the banks to meet up with the capital adequacy requirements imposed by the CBN.

     

    Enhanced Capital Base:

    Recapitalization will birth bigger, stronger, and healthier banks which ensure financial stability. This can boost the capacity of banks to absorb losses and maintain going concerns even during economic upheaval.

     

    Improved investors’ confidence:

    When there is recapitalization investors and depositors will have more confidence in the banks’ stability and solvency. This can lower the level of withdrawals by depositors and reduce funding costs for the banks.

     

    Additional Capital Inflows:

    When there is recapitalization, foreign investments will be attracted into the economy, which may enhance the Nigerian currency (naira).

     

    Improved Lending Capacity:

    With increased capital, banks are more equipped to lend to businesses, especially the real sector of the economy e.g., agriculture, manufacturing, retails, etc. This can stimulate investment and improve economic growth.

     

    Economic Growth:

    Recapitalization will ensure banks are more positioned to support the Federal Government intended goal to achieve $1 trillion economy by the year 2030.

     

    Resilience:

    Banks will become more resilient to global, market, and economic challenges/ headwinds.

     

    Enhanced Owners’ Equity Value:

    Recapitalization can result in merger or acquisition of some banks. A successful M&A scheme can create additional value to the shareholders through synergy.

     

    Downsides of Recapitalization:

    Loss of Identity:

    Some banks may collapse or lose identity to another bank through acquisition.

     

    Job losses:

    Recapitalization can result in acquisition of one bank by another. When this happens, the acquiring bank may shutdown the underperforming segments, which may result in job losses.

     

    Issue Costs:

    Costs associated with underwriting and raising additional equity capital, including regulatory fee, professional fees, marketing expenses, etc. will be incurred. This may portend additional financial burden on the banks.

     

    Dilution of Ownership:

    The proportional ownership of the existing shareholders may be impaired when issuing new shares due to the recapitalization. This will lead to reduced dividend per share, and in effect, discontent the shareholders. As a result, there may be shareholder activism, management change, etc.

     

    Management Concerns:

    The implementation of recapitalization exercise is a tedious, time-consuming, and complex activities. Considerable management efforts are required to ensure proper coordination with investors, regulators, and other relevant stakeholders. This may distract management from the smooth running of the day to day business activities.

     

    The successful implementation of the recapitalization plan will depend largely on some prevailing factors, including the market conditions, regulatory environment, and the peculiarity of the individual bank. Though, the potential benefits of recapitalization may outweigh its costs, the challenges that ensue will need to be judiciously managed to ensure its sustainability.

    Task Ahead

    Consistent with the new minimum capital requirements, all the relevant stakeholders, including the banks, regulatory agencies, etc. will be fully occupied for the task ahead. During this period,

    • All the relevant regulatory agencies, including the CBN, SEC, NDIC, etc. will be engrossed with their oversight functions to ensure successful implementation.
    • Banks may want to raise additional capital through right issues, private placement, or offer for subscription.
    • Any bank that cannot meet up with the capital requirements may be acquired by, or combined with, another bank, or cease operation.
    • Professionals such as accountants, lawyers, brokers, etc. would be engaged to provide the requisite supports and guidance.

    Investing in Shares- Look Before You Leap

    In the coming days, the banks will be out to raise additional capital from the public to meet up with the minimum capital requirements. Consequently, as a prospective investor, it is essential that you look before you leap.

    Shares acquisition can be a very lucrative opportunity because it will confer on you the ownership status in a company. As a result, you will reap the benefit of your investment whenever the company distributes dividend.

     

     

    However, before committing your financial resources into buying shares, consider your financial goals and risk appetite. This is because it is not certain that the anticipated return will be achieved. Economic conditions and external factors can impair or erode your investment. Therefore, caution should be exercised. Don’t buy shares of a company because of sentiment or emotion. More importantly, before committing your hard-earned financial resources:

    • Carry out due diligence (financial, legal, operational, etc.)
    • Critically evaluate the investment proposal to ascertain its viability
    • Seek professional advice from qualified financial advisor endowed with requisite technical know-how.
     

     

    These are essential ingredients to avoiding a catastrophic financial outcome.

    Here, are some factors to consider before investing in shares of a bank or any other company.

    If you need financial advice, kindly reach out to us at Greena Partners. Our advisory team are available to collaborate with you to provide a unique and requisite support towards making your smart investing decision.

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  • Factors To Consider Before Investing in Shares

    Factors To Consider Before Investing in Shares

    Factors To Consider Before Investing in Shares

    Factors To Consider Before Investing in Shares

    Investment in shares can be a worthwhile opportunity but requires critical evaluation and due diligence before committing one’s hard-earned financial resources into any investment proposal. This is necessary to avoid the risk of financial losses. Though, economic conditions, including recession, war, inflation, pandemic, etc. can erode the entire original investment or part thereof, but financial due diligence and sound professional advice can assist a rational investor in evaluating the available courses of action before final decision is taken.

    Set out below, are key considerations for investing in shares, including:

    1. Financial Goals
    2. Capital Investment
    3. Risk Tolerance
    4. Company Fundamentals
    5. Dividend Payment History
    6. Diversification
    7. Market & Economic Conditions
    8. Regulatory Environment
    9. Valuation
    10. Liquidity

    Financial Goals

    A prospective investor must decide on the financial goals to be achieved before investing. This is because investing decision should align with the short-term, medium-term, or long-term intended financial objectives. These goals should be specific, measurable, purpose-driven, unambiguous, and time bound. For example, your goal may be to buy a home, car, fund your children’s education, or earn stream of income at retirement. Generally, investors aim to maximize return on investment. Hence, the financial objectives should be consistent with your risk appetite.

     

    Capital Investment

    The amount of capital outlay available for investment will determine the size of the portfolio. Some categories of investment require a minimum amount while others a huge capital outlay. However, the higher the size, all things being equal, the higher the expected returns and vice versa. In addition, investment in shares will attract some incidental expenses such as professional fee, commissions, etc. Most importantly, you should:

    • Identify and compare brokerage fees, commissions, account maintenance fees, bank charges, professional fee, and other costs associated with buying, keeping, and selling shares.
    • Consider the implications of tax and inflation as it relates to shares acquisition and disposal.

     

    Risk Tolerance

    This represents the level of risk that one is willing and ready to undertake. Risk involves the possibility of losing the original investment or part thereof, due to the prevailing economic or market conditions. Generally, investing in shares is susceptible to market gyrations (fluctuations), which may negatively impact the value of your investment. It is a chance that financial losses may arise from the investment. That is why it is essential to incorporate the element of risk in the cash flow estimates when evaluating the investment proposal.

    Imagine the financial outcome of some investors in 2008 during the economic meltdown. You should learn from other investors’ past mistakes. Shares are considered the riskiest asset. Hence, before investing in shares/ stocks:

    • Assess your risk appetite in relation to the volatility of the securities.
    • Consider your age, investment experience, financial condition, and the ability to withstand any unfavourable outcome.
    • Consider your financial exposure to maximize return.
    • Integrate risk management strategies, including hedging techniques, position sizing, etc. to minimise potential losses and protect your capital investment.

     

    Company Fundamentals

    If you have some targeted companies you want to buy their shares, consider analysing their audited financial statements, including income statements, statement of financial positions, and cash flow statements to assess their prevailing financial condition. Their management commentaries and additional disclosures may also help to gain some insight into the business critical activities. Before investing in shares:

    • Carry out financial analysis to evaluate some key metrics, including revenue, gross profit margin, operating profit, EBITDA (earnings before interest, tax, depreciation, and amortization), net profit margin, return on equity, dividend capacity, and debt to equity.
    • Consider researching the companies’ management team, competitive position, product offerings, corporate governance, brand awareness and recognition, and market shares.

     

    Dividend Payment History

    The historical patterns of dividend payment provide important information about future company performance and investment returns. A company that rarely pays dividend may not likely satisfy the financial goal of an investor that desires a regular income. Therefore, before investing in shares:

    • Assess the company’s past dividend patterns, including dividend yield, and payout ratio.
    • Assess the capacity of the company to pay dividend on a consistent basis through earnings, free cash flow, and future growth prospects. Because strong financial performance is a function of future dividend payment.
    • Consider inflation and tax implications on the dividend income, and this should be consistent with your overall investment strategy.

     

    Diversification

    This is a risk management technique that mixes a wide variety of investments within a portfolio. It is an investment strategy designed to reduce exposure to risk by combining  several investments, including shares, bonds, real estate, etc. which are unlikely to all react to market conditions in the same way. As a result, volatility will be limited, since not all the asset classes, or industries will fluctuate in value at the same time. Usually, the essence of diversification is to minimize a potential risk to avoid a disastrous financial end.

    Instead of committing your limited scarce financial resources entirely on stocks:

    • Consider a mix of investments across asset classes, including shares, bonds, commodities, real estate, etc., as well as investing in different industries and geographical regions. This will make your investment portfolio more resilient to gyrations in the financial markets.
    • Avoid over-investing in a single stock or industry to mitigate the risk of significant financial losses.
    • Maintain a well-diversified investments. This will help you to achieve a more consistent returns over time.
    • Rebalance your portfolio regularly to maintain diversification, and consistent with the prevailing market conditions.

     

    Market & Economic Conditions

    These have material effect on the value of an investment. Hence, it is important for a potential investor to be conversant with the dictate of the market and economic trends. Before investing in shares:

    • Understand the prevailing economic metrics, interest rate changes, inflation expectations, including geopolitical tendencies that could affect stock market performance.
    • Monitor the market and macroeconomic indicators, central bank policy statements, geopolitical developments, and global events that could influence market sentiment and investor confidence.
    • Consider the current stage of the economic cycle, and how it could impact different industries and asset classes.
    • Be flexible and adaptable to changing market conditions consistent with your investment strategy.

     

    Regulatory Environment

    The legal and regulatory environment can impact the value of an investment. When investing in shares:

    • Understand the rules and regulations that affect investment practices, securities trading, and the stock market in general.
    • Avoid compliance risks arising from tax laws, statutory reporting requirements, and disclosures.
    • Be conversant with regulatory changes that could impact investment opportunities and market liquidity.

     

    Valuation

    This is the process of determining the economic worth of a company’s shares. Before investing in shares:

    • Carry out fundamental analysis to determine the intrinsic value of the company’s shares relative to the current market price.
    • Consider estimating valuation multiples, including price earnings ratio, dividend yield, and price to book value ratio to ascertain whether the company’s shares are underpriced, overpriced, or properly priced.
    • Other non-monetary factors, such as intellectual property, proprietary technology, brand awareness, corporate governance, business model, and growth potential should be taken into consideration when carrying out the valuation.

     

    Liquidity

    The shares should readily be sold and marketable at a price close to the quoted market price. Therefore, ensure your targeted company’s shares can be easily converted to cash when the need arises.

    In summary

    By exercising caution, asking pertinent questions from professionals, conducting thorough research and due diligence, you can be equipped to building a well-diversified investment portfolio. Though, economic uncertainties and external factors may pose challenges, effective risk management and strategic planning can help navigate market volatility to achieve long-term viable investment.

     

    Consequently, consulting with a qualified financial advisor is essential to avoid a catastrophic financial outcome. At Greena Partners, our advisory team can collaborate with you to provide a unique and requisite support towards making your smart investing decision.

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  • Factors That Influence Exchange Rates

    Factors That Influence Exchange Rates

    Exchange Rates

    Factors That Influence Exchange Rates

    Generally, exchange rate represents the amount at which one currency can be exchanged for another currency. It is mostly determined by the market forces of demand and supply and can be influenced by market sentiment and economic factors. This is because, when there is high demand for a currency, such currency tends to appreciate against the other currency. On the flip side, if there is an increase in supply of a particular currency, the currency will depreciate because supply is more than demand. The following are some of the factors that influence exchange rates between two countries:

    • Current Account Balances
    • Price Level Changes
    • Interest Rates
    • Economic Performance
    • Public Debt
    • Market Sentiment and Speculation

    Current Account Balances

    This represents the receipts and payments of export and import activities between a country and other countries of the world, involving transactions relating to goods, services, dividend, and interest. When a country has current account surplus, it indicates receipt from export transactions is more than its payment for import, and in effect, its currency appreciates. But when a country’s import economic activities outweigh its export, this results in current account deficit. The excess demand for foreign currency will lead to the depreciation of the domestic currency.

     

    Price Level Changes

    Inflation is the general increase in the prices of goods and service leading to a fall in the purchasing power of money. When there is inflation, the value of money (the amount of goods or services that money can buy) will decline. Therefore, a country with a higher inflation rate relative to its counterparty will experience currency depreciation. A country currency will appreciate if its inflation rate is lower as compared with the inflation rate of the oversea trading partners. For this purpose, a country inflation rate is inversely related to its exchange rate.

     

    Interest Rates

    Interest rate is the compensation required by the suppliers of debt capital. It represents the rate of return to the bondholders on their investments. A country with a higher interest rate has the propensity to attract capital inflows (i.e., foreign investment) into the economy and increase the demand for the domestic currency. This, will in turn, lead to the currency appreciation. Usually, foreign investors will commit their limited scarce financial resources in a country where they can earn a higher return on their investments. However, it should be noted that positive correlation exists between interest rate and exchange rate. This means that if a country’s interest rate increases, its currency will appreciate, and if a country lowers its interest rate, its exchange rate decreases.

     

    Economic Performance

    A country with a strong economic performance arising from stable fiscal policies, low unemployment rates, and high GDP growth will experience increase in demand for its currency. These strong economic indicators have the tendency to enhance exchange rate of the country. Whereas a country with unstable or high political and economic risks will find it difficult to attract foreign investments.

     

    Public Debt

    This represents the total debt obligations owed by a country to its creditors. A country with a high level of sovereign debt consistent with its GDP, will find it difficult to attract foreign investment, leading to its currency depreciation. Whereas a country with a lower debt to GDP ratio can attract capital inflows, leading an increasing exchange rate.

     

    Market Sentiment and Speculation

    The investors’ or market participants’ perceptions about a country political and economic conditions can make exchange rate susceptible to market gyration in the short-term. Traders can speculate and adjust their positions to observe market reaction.

    In summary, a decrease in exchange rate will impair the purchasing power of money, which will make a domestic currency unattractive to foreign investment. The exchange rate movements can be difficult to predict with some degree of certainty due to complex underlying factors. Essentially, rational investors should have minimum knowledge and understanding of the foreign exchange market in the determination of a currency value, and the rate of return on their investments.

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  • Stakeholders Engagement

    Stakeholders Engagement

    Stakeholders Engagement

    Stakeholders Engagement: Meaning & Importance

    The principal goal of every profit-making organization is to enhance the shareholders’ value i.e., increase the wealth of the owners. This goal may suffer significantly, if the company is unable to increase the value of the business. The company may not be able to create value for the business if the operating environment is turbulent and hostile.

    Therefore, to achieve a beneficial outcome, companies must engage effectively with the relevant stakeholders. This is premised on the fact that companies do not exist in isolation and that the company’s success is dependent on the contributions of other stakeholders. As a result, companies should not focus only on making superior profit to maximize owners’ wealth but should also consider the divergent interest of other claimants to the company’s limited scarce resources.

    Stakeholders

    Stakeholders may be described as any individual or party that has a competing interest and relationship with a company. They are a party, including the shareholders, bondholders, government, employees, etc. who potentially have a claim on the company’s cash flows. Basically, there are internal and external stakeholders with differing interests that can directly or indirectly affect the activities of an organization.

     

    Internal Stakeholders:

    These are the people involved in the day to day running of the business and develop the corporate governance process of the organization. These internal stakeholders include the:

    • executive directors,
    • senior managers, and
    • other employees of the company.

     

    External Stakeholders:

    This stakeholder group exert some influence on the activities of the company but are not directly involved in the governance process. They support the activities of the company with the expectation that the company will deliver the desired result through regular payments of dividend, and interest, quality products, additional orders, tax revenue, jobs opportunity, and operate responsibly by preserving the environment. These group of stakeholders include:

    • Shareholders
    • Creditors/ debtholders/ lenders
    • Customers
    • Suppliers
    • Investors
    • Competitors
    • Government
    • Labour Unions
    • Civil Society Organizations
    • Religious Organizations
    •  Community.

     

    The interest and influence that these individuals or groups possess vary significantly. However, each of the stakeholder groups must be taken into consideration during governance process and adequately rewarded for their supports and contributions towards attainment of the corporate objectives. This is because if they withdraw their contributions or services to the company, it can threaten the going concern of the business.

    Stakeholders Engagement

    Stakeholders engagement involves the process of communicating and building understanding and rapport between companies and their stakeholders. Building quality relationships will enable a company to strategize, gain insights to know the divergent interest of the claimants, and determine how to better engage them to achieve a beneficial outcome.

    In corporate governance, there is a stakeholder theory that focuses on the impact of corporate actions on all the relevant claimants of the company’s cash flows. The company managers, including officers and directors should be intentional about converging the opposing interests of all the stakeholders during policy development and governance process. This will help to reduce the conflicts between the company and its stakeholders.

    Though, certain stakeholders may be confrontational, and seldomly demonstrate a challenging disposition by constantly criticizing every decision or action taken by the company’s management irrespective of its merit. In such situations, it is essential that the management show responsibility to foster effective communication to align opposing tendencies.

    Why Is It Important to Engage Stakeholders?

    Stakeholders’ engagement is essential for several reasons, including:

     

    Understanding the Stakeholder Needs:

    Companies will gain insights into the needs, concerns, and expectations of the stakeholders by constantly engaging with them on the issues that matter to the parties. As a result, company will be able to deploy strategies that is consistent with or meet the stakeholder expectations.

     

    Managing Expectations:

    Engaging with the stakeholders will help to manage, foster, and align their expectations. Thus, allowing company to prevent or mitigate potential conflicts and misunderstandings.

     

    Managing Risk:

    Engaging stakeholders regularly can help a company to identify and manage potential risks that can impair its reputation. Managing and proactively addressing the concerns of the stakeholders can help the company to avoid any catastrophic outcome.

     

    Communicating Effectively:

    Consistent and open communication have the tendency to build trust and credibility between the company and its divergent claimants. Trust is an essential ingredient to achieve a lasting business and professional relationships.

     

    Good Reputation:

    Maintaining cordial relationships with the relevant stakeholders can enhance a company’s reputation. This is because a company with good reputation has the tendency to attract and retain best talents, investors, customers, and promote brand recognition.

     

    Collaboration and Innovation:

    Collaborating with the employees, partners, customers (clients), and lenders, including providing conducive working environment can enable a company to develop creative and innovative ideas to solve business problems. Some stakeholders are experts in their respective field, therefore collaborating with them can enhance the company’s market competitiveness.

     

    Maintaining Going Concern:

    Consistently engaging and communicating with the stakeholders can enhance mutual business relationships. This ensures that the business enjoys the right supports and the going concern is sustained for the foreseeable future. If the stakeholders withdraw their contributions, it can curtail the operations of the business.

     

    Ethical Consideration:

    Engaging with the relevant stakeholders, including the employees, customers, community, etc. on ethical practices demonstrate a commitment to sustainability, or corporate social responsibility.  In today’s social conscious landscape, it is imperative for businesses to consider the consequential effect of their social, economic, and environmental actions on the various stakeholders.

     

    Legal and Regulatory Consideration:

    Regularly working with the applicable regulatory authorities within the industries will enable the company to mitigate compliance risk and meet legal and regulatory requirements promptly. 

    In summary, stakeholders engagement is designed strategically to foster understanding, respect, trust, collaboration, compliance, innovation, and sustainability. While it may involve some levels of intricacy because of its broader approach, its effective integration can contribute positively towards achieving a desired results for an organization. 

    Engaging with stakeholders constantly will mitigate potential risks and conflicts, including uncertainty, misalignment, and resistance to organizational change. However, a stakeholder mapping is essential to identify, understand, engage, and communicate with the groups that possess significant influence and interest in the company.

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