Since the outbreak of the coronavirus pandemic which started earlier, there have been a lot of spontaneous changes from different sectors of the economy in an attempt to keep up. Naira has been devalued twice within the space of six months, following the crash of oil prices and scarcity of dollar due to the restrictions placed on dollar sales to BDCs (Bureau De Change) operators in Nigeria. Consequently, there is a ripple effect on companies and organisations that depend largely on foreign countries for goods, raw materials and services. Investments are also significantly affected.
The recent devaluation to N381, which follows the devaluation from N307 to N360 in March will be more brutal for SMEs and startups especially with the COVID-19 crisis still very much in the picture. This is because they will have to pay more on transactions and loans without any compelling increase in revenue.
In spite of the gloomy situation of things, there are several steps these startups and businesses can take to cushion the effect of this devaluation or any future ones and stay on top of their games.
Here’s a list of those steps;
For the next few months, the first thing SMEs and startups will observe is the increase in operational cost especially for those whose operations or services are based on foreign partnerships or transactions.
There are several ways to manage this. One is by prioritizing local partners over foreign ones if not substituting them, of cause if you are observant enough you would have found that some companies are beginning to restrict their services based on locations while others are reinventing how they operate in order to maximize the situation without suffering recurring loss. This will transform all operating cost to Naira thereby removing the effect of devaluation.
Another is factoring the naira devaluation into the finish price of goods. While many SMEs may do this, it probably isn’t the best decision for startups with huge competitions.
Like my Boss will always say “Act Local, Think Global”, for startups, a better decision would be to start thinking business beyond Nigeria. This means thinking about expansions into other African countries with more stable economy than we have here and a stronger currency like Kenya, one of the countries Jydee Partners and Network; a company who is strongly committed to providing a seamless financial experience for businesses within Africa is currently preparing to explore.
Startups offering digital services like payment gateways can especially take advantage of this as they do not need physical resources and infrastructure to operate in a foreign country.
For SMEs who require physical resources or infrastructure, a feasible option will be to partner with businesses or startups in neighboring African countries that can help in managing the physical part of their business.
By doing this, startups will not only increase their market and revenue, they will be able to escape the side effects of naira devaluation. They only need to open a dollar account and start actively making sales and collecting payments in foreign currencies. Visit https:jydeepartners.com to get started.
The emergence of social media channels coupled with other web technologies have birthed a whole new well of possibilities and opportunities. Businesses can stay connected and make transactions with anyone anywhere in the world with the use of these technologies without breaking a safe.
Startups and SMEs can leverage on these tools to expand their customer base from Nigeria to just about any country in the world.
Because of the strain an unprecedented change like the devaluation in naira can cause a business especially when this kind of events aren’t factored into the agreement, a wise option is to initiate a conversation with the foreign partners about the new reality and the threats it poses, a compromise may be feasible.
Like the case of DSTV, where the cost of buying a license to show Premier league and other foreign leagues became overly expensive prior to the reduction in revenue caused by naira devaluation. A good move by DSTv will be to call for a meeting with license regulators of the league to reach a compromise so the cost is bearable.
Aside high operational costs another thing that could quickly crumble startups is paying interest of foreign debt fund after devaluation, it could mean having to pay more.
One strategy startups can use to curb is referred to as Currency Hedging. By hedging the dollar, a startup can protect itself against unprecedented changes in currency exchange rates. Hedging can be done by purchasing or booking different types of contracts that are designed to achieve specific goals like paying interest on debt funding.
Another is converting the funds to dollar well before you need it. So if an SME has liquid cash way above the fund to effectively run operations it is advisable to convert it to dollars.
In conclusion, the best way for startups and SMEs to survive naira devaluation is to plan and prepare for it. Although all the measures are good options to take after devaluation, it’s better to take them as preemptive measures rather than as cures, you want to keep your balance.