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.

Peter Drucker - This is what creates trust.

 

"The leaders who work most effectively, it seems to me, never say "I." And that's not because they have trained themselves not to say "I." They don't think "I." They think "we"; they think "team." They understand their job to be to make the team function. They accept responsibility and don't sidestep it, but "we" gets the credit. This is what creates trust, what enables you to get the task done."

Peter Drucker

Important Considerations When You Negotiate Insurance Coverage.

 To survive and succeed in life, you must take risks. To manage many risks in life, you need insurance coverage.

What Is Insurance Coverage?

Insurance coverage is the amount of risk or liability that is covered for an individual or entity by way of insurance services. 

With an insurance cover, you transfer the cost of a potential loss to the insurance company in exchange for a fee, known as the premium. Insurance companies invest the funds securely and pay out when there’s a claim.

It is not enough to take out an insurance policy, you must know the important considerations to make when you negotiate insurance covearge and after you haven taken out a cover. These considerations are fundamental to making a successful insurance claim.

What are these considerations?

1. Get a full description in writing of every documentation the insurer will require should you have any claim to make,

2. Do a comparative analysis of claims filing procedures of different insurers offering the insurance you are interested in,

3. Bring in your lawyer at the first sign of delay,

4. If the insurer still refuses to keep their own half of the contract, threaten to report the insurer to the appropriate insurance commissioner.

Little Survival Details A Startup Must Not Overlook.

 "Data from the Bureau of Labor Statistics (BLS) shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more. These statistics haven't changed much over time, and have been fairly consistent since the 1990s.Though the odds are better than the commonly held belief, there are still many businesses that are closing down every year in the United States."

For a startup to grow a going concern that outlives the founder, attention must be paid to little details, after all God is in the details.

What are these details? They are!

1. Ideas,

2. Cash flow,

3.Salesmanship..

What have successful entrepreneurs said about ideas?

1. Capital isn’t that important in business. Experience isn’t that important. You can get both of these things. What is important is ideas. – Harvey S. Firestone.

2. Get a good idea and stay with it. Dog it, and work at it until it’s done right.– Walt Disney.

3. The air is full of ideas. They are knocking you in the head all the time. You only have to know what you want, then forget it, and go about your business. Suddenly, the idea will come through. It was there all the time.– Henry Ford.

What have entrepreneurs said about cash flow?

1. If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.- Jack Welch.

2. Never take your eyes off the cash flow because it's the life blood of business.- Richard Branson.

3. If you look at academic studies, you can see that stock prices are most closely correlated with cash flow. It's such a straightforward number. Cash flow is what will drive shareholder returns.- Jeff Bezos.

What have entrepreneurs said about salesmanship?

1. "You Don’t Need A Big Close As Many Sales Reps Believe. You Risk Losing Your Customer When You Save All The Good Stuff For The End. Keep The Customer Actively Involved Throughout Your Presentation, And Watch Your Results Improve.” – Harvey Mackay.

2. "Sales Are Contingent Upon The Attitude Of The Salesman – Not The Attitude Of The Prospect.” – W. Clement Stone.

3. "Keep Yourself Positive, Cheerful And Goal-Oriented. Sales Success Is 80% Attitude And Only 20% Aptitude.” – Brian Tracy.