The proposed common currency, the "sur": What investors should expect.

 Argentina and Brazil are set to begin preparatory work to establish the second largest currency bloc in the world. The name suggested for the new currency is "sur". 

The "sur" when it officially becomes a medium of exchange in the two largest latin American economies, would facilitate comparisons of prices and other key investment decision parameters. 

What else should investors expect?

A look at lessons from "euro", the largest currency union would be helpful.

The euro eliminates currency risk within the eurozone. It facilitates and promotes cross border invesments by businesses. Businesses operating in both Argentina and Brazil would no longer face currency risks if and when sur becomes a daily currency in both countries.

Elimination of currency risks and facilitation of price comparison would enable cross border businesses in the two countries to lower costs and increase profits. How?

Businesses would have a range of best deals from suppliers to choose from. They would also use the ease of labor mobility to easily move their best hands between both countries. 

They would have the enabling environment to create packages that attract best hands from competitors within the currency union.

There's also enjoy benefits deriveable from the possibility of currency stability. One of them would be the lowering of interest rates and the increasing of the possibility of appropriate capital allocation between subsidiaries. 

However, during a period of depression in a partner currency, economic growth would slow down and unemployment would increase. When this happens, investors would become apprehensive about liquidity. 

A shrinking in the volume of cash in circulation would cause interest rates to rise. The common currency policy is unlikely to allow a partner country to unilaterally print more money, inject it to stimulate the economy and reverse an economic depression. Businesses would have to cut jobs and eventually, die if the situation persists.

Balancing the budget is like going to heaven. Everybody wants to do it, but nobody wants to do what you have to do to get there.– Phil Gramm.

Every budget is a test of your capability to balance your expenses and your income.

It's a tough test that many of us fail. The reason is simple, most of us are never prepared to live within our means.

Most of us when we have a little, we want to prove to those who don't really care about us that we have arrived 

and when we're sent packing from the heaven the people built for us, we go outside our means to buy mansions in the hottest part of hell in attempt to prove to the world that we are still in heaven.

Who really cares about where you're , what you have and how you are at any time of your life?

Maybe your loved ones, outside them you're alone.

So, if you want to balance your budget and achieve financial freedom,

you've to die to what people think of your lifestyle, how they live without fiscal discipline and live within your means.

Special Purpose Vehicle, SPV, Isn't Always Created To Commit Financial Fraud.

What's the primary job of every entrepreneur? Take profitable risks, do everything legitimate to at least preserve capital when profit can't be made.

This job wouldn't be done when a business survives the volatile early stage, breaks even, enjoys profitability for few years and then goes bankrupt as a result of venturing into risky ventures. The going concern concept would be defeated. 

So, what long term business survival options do some entrepreneurs pick to preserve their assets when they go into volatile ventures? One of them is the Special Purpose Vehicle (SPV) also known as Spechial Vehicle Entity (SPE).

A special purpose vehicle or special purpose entity is defined as a subsidiary created by a parent company for a special purpose.

The special purpose most often, is to isolate a parent company from financial risk by providing securitization of assets 

The above is made possible by the fact that SPV has Its legal status as a separate company. This status makes its obligations to secure its assets in the eventuality of the parent company going bankrupt possible. This is why SPV is sometimes called a bankruptcy-remote entity.

As a subsidiary with a legal entity status, a SPV has its own distinct balance sheet ( a picture of its assets, liabilities and capital) that's often off the balance sheet of the parent company. This is where investors have a problem with SPV, as it could be exploited to hide losses

However, some businesses create SPV for one purpose, to aecuritize debt and give investors the assurance of repayment. And not always to commit financial fraud 

Learning Curve Theory

A worker is likely to gain experience, become more efficient and faster as they carry out a repeated performance of a job task. Human beings improve skills, gain experience, exposure and specialize as they repeat the performance of a particular task. This is known as the learning curve effect.

A worker with the no previous experience and knowledge is untried the first time they perform a new operation. As the worker repeats the operation and becomes more familiar with it, their labor efficiency increases and their labor cost per unit decreases. After the passage of time, the regular rate of decline in cost per unit is established and used as a basis to predict future labor cost..

The learning process begins at the point the first unit comes off from the production line. And each time cumulative production is doubled, the average taken to produce a unit of cumulative production is a percentage of the average time of the previous cumulative production.

What is the learning curve theory?

The learning curve theory says that whenever a repetitive task is performed, the average time spent to produce a unit falls by a specific percentage as the activity level is doubled. For example, there is a learning phenomenal of 80% for a 20% decline in average time and a 75% learning phenomenal for a 25% decline in average time.

The learning curve is the mathematical expression of the phenomenon that when a complex and labor intensive procedures are repeated, unit labor times tend to decrease at a constant rate.

Naira Redesign, Withdrawal Limits And Credit Worthiness of Nigerians.

 

Currency redesign by the Central Bank of Nigeria and its complementary withdrawal limits have come to stay.

The recent news from the Central Bank of Nigeria (CBN) is an indication of the near irreversibility of the policy implementation. The news claimed that volume of currency in circulation, not in vaults of banks has dropped by at least 5 percent in just one month.

So withdrawal limits are going to be enforced to the letter but Nigerians may not have the luxury of time (Senate is urging CBN to set June 30, 2023 as the new deadline). 

In the event of no deadline extension beyond January 31st, 2023, how're Nigerians going to make urgent purchases above weekly withdrawal limits? Or even make long term arrangements?

Financial transactions are often done on two bases, cash and credit. In many economies, where individuals take their creditworthiness serious, most financial transactions are done on credit basis. In Nigeria, it's mostly on cash basis and soon, this is no longer going to be possible for transactions that involve a lot of money. 

Payments for large purchases would be made mostly either through the online banking channel or on installmental basis (this is where trust or positive goodwill would be a major consideration).. 

The installmental payment arrangement would force many Nigerians to pay serious attention to their creditworthiness. The time to start doing that is now.

Nigerians have to begin to build their capacity to meet current maturing liabilities (pay what's due as at when it's due). To build this capacity successfully, Nigerians would have to learn to make budgets and stick to them.l (time for strict fiscal discipline).

Budgets should include amounts and time to pay all outstanding current liabilities. When you think other distractions may cause you to forget, give your banker standing orders to effect payments to your creditors when they fall due. Failure to pay what is owed at agreed time would not improve credit worthiness. 

Don't buy on credit and make an arrangement to pay installmentally in anticipation of a cash inflow that is not regular. Credit purchases and commitments to pay should be tied to only regular income. 

When you fail to pay up when payment is due, it affects the business of a creditor negatively. The creditor may no longer have the fund to restock and continue in business. 

And when the creditor is forced to go out of business because of indebtedness, the world would get to know about how seriously unworthy of credit some people are (bad character, bad publicity). Make sure your name is never on that list.

The Importance of Capital Gearing Ratio To Business Financing.

 Having a great business idea without a startup capital is like wandering a vast desert in search of an oasis. You are literally going to leap in when you see one. Then gulp down the water with all the impurities.

It’s wise to understand what capital gearing is before you decide to borrow or not to borrow to start your business.

What is capital gearing?

It’s a financial ratio that shows the amount of debt of a company to it’s equity. It’s a measure of financial risk. This risk increases toward volatility as the ratio of debt to equity gets higher.

The higher the gearing ratio, the more the interest payable on debt and the lower the earnings on equity. You may end up borrowing to service debt commitments.

The risk doesn’t end with sinking deeper into more debts, your control of the company could also be threatened.

Your creditors may want to teach you best ways to run your business profitably. This may come in the form of business partnership and so called, “business support”. In most cases, their way will not be on the same level with your vision.

Before you look to lenders for funding, have an amount of equity that would guarantee a lower capital gearing. Your capital gearing should be a ratio that keeps with you, the control and the freedom to be proactive and react quickly to evolving trends.

Only borrow when you’re certain you will have a positive leverage. That is, only when projections indicate that your earnings from the application of debt are going to be greater than interest payable on debt.

But should you even borrow to start a business? The answer is Yes. Debt financing is not a bad idea if you’ve sincerely mastered strategies that guarantee favorable returns on intended investment.

You must also be ready to work hard and proceed as if you were bootstrapping.

As a takeaway, keep the gearing ratio lower than 25 percent.

First published on Ayietim Blog

Why Is Understanding Opportunity Cost Important?

 

It’s very difficult to achieve financial prosperity without puting the concept of opportunity cost to use in your spending.

It’s normal to have many wants competing for your money, which may not be enough to get all of them for you.  So, to get the best out of your spending, you must understand the value attached to the best alternative foregone.  This is opportunity cost.  

Understanding ande applying the concept of opportunity of cost to your personal finance, are going to help you achieve the following seven personal financial goals;

1.Spending  Within Budgetary Provision:

A good budget should be a financial plan that accommodates absolutely necessary expected spending within expected income.  Obviously, a good budget is not possible in the absence of opportunity cost as you wouldn’t be to put in the budget, only things which enhance personal financial health.  

So after the budget has been set up with the help of opportunity cost,  you would stay within your budgetary spending limits if you stuck to your budget.

2. Acquisition of Only Relevant Current Assets ;sm

This is possible with the aid of opportunity cost.  When the value of the best alternative is foregone, it means an alternative with a higher value is chosen.  When current assets like vehicles, and furniture are purchased on the basis of durability, most flexible usability and best maintenance option, then only relevant ones are chosen and acquisition of toxic assets are avoided.

3. Elimination of the Purchase of Toxic Assets:  

As mentioned above, the purchase of toxic assets is avoided when opportunity cost guides every purchase.

The elimination of toxic assets from your current assets is important as wasteful maintenance costs are eliminated.

Apart from the elimination of the leakages through wasteful maintenance costs, valuable space is saved for relevant current assets. And .more money is freed up to fund financial growth.

4. Money is freed up for savings:  

No money spent on toxic assets means more money saved.

As more and more potentially redundant assets are struck-off your spending list, more and more money is saved.

5. More Money Saved means significant: Capital (or equity) for investment in other streams of income.

What is the significant of this?

It gives financial health to your money because your saving begins to outweigh your spending..

6. Opportunity Cost is a good guide to good investment:

Opportunity cost if applied objectively and professionally, should help to narrow your options to the most viable investment opportunities available.  

You should be able to rank investment opportunities in terms of highest returns and quickest pay back periods then go for the one that best guarantees your investment.

7. Credit Rating / Worthiness Improvement:

A consistent application of opportunity cost to your spending should naturally help you to lower your indebtedness and consequently improve your credit rating.