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Cost, challenges and risks of doing business in Nigeria 2017

Are you thinking of investing or setting up a business in Nigeria? Do you want to know the cost, risks and challenges of running a business in Nigeria in 2017?

If you are actually serious about starting a business and you want to know the cost and challenges of running a business in Nigeria then I advise you stay tuned and read this article completely.

“There is huge satisfaction from building a successful business. It feels good when you are able to build a good team around you. It is particularly rewarding to watch people progress through your company over time whether it is through different roles, or just maturing into their positions”.

Nigeria is a country with vast business opportunities. When it comes to starting a business in Nigeria; many investors and entrepreneurs will be lured into jumping in with both feet first without knowing the risks and challenges involved. The country has proven to provide a fertile ground for foreign business investors. Countries like China, South Africa, South Korea, etc are struggling to invest or setup outlets in Nigeria. Big brands like Samsung, LG, Shoprite, Techno, Google, Microsoft, HP etc, are already in Nigeria and are quite expanding without control

Domestic businesses are also thriving very well. Successful entrepreneurs like Aliko Dangote (The pan-African Business Mogul), Mike Adenuga (The Guru and his Enigma), Femi Otedola, Folorunsho Alakija (An Amazon Who Dares), Abdulsamad Rabiu (Truly a Chip off the Old Block) who started from scratch and built massive business empires without leaving the shores of Nigeria are evidence that doing business in Nigeria can be profitable and highly rewarding.

Despite having the necessary fertile ground for developing massive business empire in Nigeria, many start–up businesses still fail.

Why? Because they failed to analysis the cost, challenges and risk involve in investing or doing business in Nigeria.

Is it important to know the cost, risk and challenges in doing business in Nigeria?

Yes! It’s important to understand the costs, risk and challenges specific to your business start up, regardless of its size. Getting the number right will help you determine what financing you may need to help you get off the ground, what it will take to reach your breakeven point (when you can expect to start making a profit), and manage cash flow once you’re up and running.

I don’t know where you are reading this article from. You can be reading this article from one locality in Nigeria, some other persons can be reading it from UK, United State, India, Pakistan, Cameroun, Ghana, South Africa, Philippines, Malaysia, Canada, Europe, China, Dubai, Germany, Indonesia, Jamaica, Kenya, London, UAE, USA, Australia, Turkey, India, Congo etc; you should understand that economy and environment differ significantly and so the costs, risks and challenges of operating a business in these place.  If you are actually serious about starting a business in Nigeria below are the costs, challenges and risks of investing or doing business in Nigeria; get yourself familiarize with them.

 Cost of doing business in Nigeria

On early month of March, 2017; Central bank of Nigeria (CBN) indirectly admitted that the cost of doing business in Nigeria is very high. According to CBN, “it is component of many factors and not interest rate alone as generally perceived”.

I will like to break down the costs of doing business into 2 categories:

  1. Overhead costs – those costs you required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. It include things like
  • Your Accounting and legal expenses
  • Administrative salaries
  • Depreciation
  • Insurance
  • Licenses and government fees
  • Property taxes
  • Rent
  • Utilities
  • Cost of Market Research

An overhead cost of establishing a typical medium scale business in Nigeria today is roughly N1, 500, 000 – N2, 500, 000. Some overhead costs are fixed while others may change over years.

  1. Direct costs – those costs you need to create products and services, such as direct materials and direct labour.

A rough estimate of a direct cost of running a typical medium scale business in Nigeria today amounts N2, 000, 000 – N2, 500,000. Direct costs are variable cost. It changes from day to day and locality to locality.

Overhead costs + Direct costs = Total cost of doing a business.

In other words, to start up a typical medium scale business in Nigeria today; you need a rough estimate of N4, 000,000 – N5, 000, 000 (four million to five million naira)

 

Challenges of doing business in Nigeria 2017

There are general business challenges and factors that can affect business start-up all over the world but when you consider economic and environmental challenges; it varies from region to region. So, below are the challenges of doing business in Nigeria in this 2017

  • Challenge on the way government borrows

Government’s borrowing has become a major problem for entrepreneurs and investors. Government is borrowing at 18 per cent, 20 per cent and zero risks.  How can you as a private sector business to compete? And that is why all funds in the economy now are going into treasury bills; they are goes into federal government wallet. This has made it very difficult for the private sector to play its role in the economy in terms of this rescue mission. As it is now, there is no way you can compete with government in the financial market, even the banks; they would rather buy treasury bills and bonds than to give money to manufacturers.

On account of interest rates, it is ranging between 25-30 per cent. How can domestic investors invest profitably when you are having an interest rate of 25-30 per cent?

If you really want to start up a business and you don’t have enough capital, I will advise you source your fund through angel investors and relatives rather than borrowing from Government or banks. This is the best way to avoid the challenge of government’s zero risks borrowing.

  • No incentives and subsidy for domestic investors

There are no incentives for domestic investors to even play significant roles, and these are the kind of things that shape economy and the investments people do. Because as they say, “an economy gets the kind of investments it deserves.” It is the incentives, the policy that determines the kind of business people will do, and that is why there are so many disincentives for investors to go into real sector (Manufacturing, Agriculture, Solid minerals) investments because of the issue of cost of funds.

 

  • Lack of Basic infrastructure/technology

Nigeria lacks the basic infrastructure and logistics that support medium and large scale businesses. There is a poor internet service. If you are going to run a successful business in Nigeria; then you must have the financial capacity to provide your own basic Infrastructures.

Take for example, you want to start a production firm in Nigeria; you will need to provide your own water supply, electricity and other amenities that are required for  smooth running of the  business.

This very single factor prolongs the time frame from initial planning to full business operations when compared to developed countries that have the basic infrastructure in place. Lack of basic infrastructure will either directly or indirectly increase your startup overhead costs. So, ensure you factor in this challenge during your business planning.

·         Erratic Power Supply

This is a serious factor grossly militating against the growth of small and medium scale businesses in Nigeria. Top companies operating in Nigeria has found a way to deal with the challenge of erratic power supply by providing their own energy supply.

Moreover, there is serious improvement in power supply in Nigeria this year. The power sector has been deregulated and the licenses given to private investors to run their own independent power stations. So much has been going on in that sector and a lot have improved.  However, the improvement simultaneously goes with the high charge of electricity bill.

  • Inadequate Security

If you are a foreigner wanting to invest in a business in Nigeria, you seriously need the service of security agent(s). This doesn’t mean that domestic businesses do not security. Every business in Nigeria needs security. But I think it’s worthwhile to say that there has been a massive beef-up by the government with respect to security However, I don’t think the security challenge has completely been eradicated or going away anytime soon; so you have to be prepared to deal with it.

  • Inconsistent Government policies

Government make policies that on many occasions militate against operation of business in Nigeria. Governance is something investors and entrepreneur have no control over; all entrepreneurs can do is try to influence government’s policy with respect to enacting favourable business laws. But you must have a political god-father and massive resources to be able to influence government laws. Unfortunately, you may not have such political godfatherism or financial capacity to influence government’s policy so the best strategy to combating the ever changing policy of the government is to keep an eye on government laws and swiftly adjust your business to align with these policies.

  • Bad road network and poor transportation system

The source of raw materials you need may not be situated close to your target business location. So, it is now left for you to decide if to locate your business close to the raw materials or close to your market. Whether, it is the transportation of raw materials or finished products that is involved; bad road network and poor transportation standard will always pose a great challenge if you intend operating a business in Nigeria. Poor transportation system and bad road network is one of the militating factors against industrialisation in Nigeria but the government are seriously tackling it through the construction of new road, upgrade of old roads as well as reconstruction of railway line.

  • Corrupt practices

The last but not least among challenges of doing business in Nigeria is corrupt practices.  These corrupt practices include things like: unnecessary levies and duties, bureaucratic bottlenecks at various government agencies like CAC, NAFDAC, etc; high cost of obtaining business licenses and permits.

In conclusion, it is worth to note that in spite of all these challenges listed above, businesses (both domestic and foreign) still flourish in Nigeria. So, I don’t think you should be discouraged by the challenges. A good business strategy that has work magic is the development or formation strong business management team that will tactically position your business to withstand this time of high inflation and the ever increasing demands of the government.

The High population of Nigeria has made the country target market for many businesses.

The federal government, especially the present administration is making some effort to   support both small and medium scale enterprises in Nigeria. The tariff increase for the importation of used cars is encourage the indigenous manufacturers like Innoson (IVM) and also attract foreign car manufacturers like Honda, Toyota, Nissan, etc into the country. In addition to all these are this year’s budget of change and the present government macroeconomic policies and, economic and business growth strategy and support plans

The above costs and list of challenges of doing business in Nigeria should not discourage from starting that your dream business. I have drawn your special attention to them to help prepare you in advance because a man prepared has half fought the battle.  Start a business today and tomorrow you will be financially free.

Read more:

  1. How to start small business from scratch  in Nigeria.
  2. 100 + profitable small business idea you can start in Nigeria today.
  3. 10 Qualities of a good entrpreneur.
  4. How to start a decent business with small capital  in Nigeria.