A cocoa plantation

By Agosile Akinjide Dickson

1.0 NOT LEVERAGING GORDON GROWTH MODEL

In the realm of Nigeria’s cocoa industry, the plight of farmers battling with poverty underscores the crucial need to internalize the fundamentals of the Gordon growth model. Understanding the Gordon growth model (b × r) is key for aspiring entrepreneurs. ‘b’ denotes the retention rate, signifying reinvestment from profits, while ‘r’ represents the rate of return, depicting earnings on capital.

A prevailing trend among farmers in the cocoa industry revolves around a myopic focus on the rate of return (‘r’), fixating primarily on maximizing profits without due attention to retention. Conversations with numerous farmers and small-scale brokers reveal a recurring cycle: procuring capital from off-takers, engaging in cocoa trade, settling debts by year-end, and subsequently seeking advances by April. This reliance on continuous advances assumes perpetual support from off-takers and an expectation that future productivity will offset these debts.

Breaking away from this cyclical dependency demands a paradigm shift towards considering the retention rate (‘b’). It’s essential to avoid the repetitive annual cycle and instead foster more sustainable and robust businesses. While obtaining advances from off-takers seems beneficial, resembling interest-free loans, it shouldn’t overshadow the imperative to build internal equity. Businesses must diversify their approach, understanding that off-takers might not consistently offer advances.

Bags of cocoa being loaded from a produce stall in Idanre.

For a resilient and prosperous future in the cocoa industry, aspiring entrepreneurs should heed the importance of both ‘b’ and ‘r’ within the Gordon growth model. Balancing reinvestment and profitability can pave the way for sustainable growth, reducing dependency and fostering self-sufficiency within the industry.

2.0 CORPORATE FINANCE DEFICITS

In the intricate landscape of Nigeria’s agribusiness sector, the disparity between local players and international competitors in accessing funding remains a substantial obstacle. Medium-sized agribusinesses often find themselves in a challenging position, contending with global competitors hailing from stable countries that can offer loans at remarkably low interest rates, sometimes as low as 5%. Conversely, local entities might secure funds from commercial banks at significantly higher rates, ranging from 27% to 30%. This glaring contrast inherently creates a financial advantage for international players, granting them a competitive edge solely based on access to cheaper capital.

To bridge this financing gap and bolster the local agribusiness landscape, the federal government established institutions like NEXIM and BOI, designed to provide funding to agricultural enterprises at considerably lower rates. However, despite these initiatives, many agribusinesses do not know of these funding opportunities. Consequently, they resort to securing capital at exorbitant rates, which invariably eats into their profits—funds that could have otherwise been reinvested to expand operations and augment their wealth.

This financing disparity echoes in the market dynamics, affecting the ability of local players to compete effectively. International competitors, by access to cheaper funds, exhibit greater flexibility in pricing and can consequently move larger volumes, expanding their market share exponentially.

For the emerging generation venturing into this agribusiness space, minimizing this corporate finance deficit becomes pivotal. Accessing subsidized funding from institutions like NEXIM and BOI is a strategic move to level the playing field. By leveraging these opportunities for lower-rate funding, young entrepreneurs can mitigate financial burdens, channel more resources into business growth, and position themselves competitively in the market. This proactive approach not only aids in scaling up operations but also enables local players to maximize their potential in the industry, fostering sustainability and resilience in the face of global competition.

3.0 FORGETTING TO BUILD SYSTEMS

The often-overlooked art of establishing robust systems plays a pivotal role. Drawing from Robert Kiyosaki’s insightful distinctions in his book ‘Rich Dad’s Cashflow Quadrant,’ a critical differentiation emerges between a business owner and someone self-employed. Crucially, a business owner can step away from the office premises with confidence that operations continue seamlessly. Conversely, for the self-employed, their absence halts cash flow generation and other vital economic activities.

In the realm of small-scale agribusinesses, this distinction is strikingly relevant. Farmers and owners frequently find themselves entrenched in day-to-day operational tasks, neglecting other critical facets of the business such as corporate finance, strategy, and sales. However, the intricacies of building a business in Nigeria add layers of complexity, notably in navigating the trust factor.

Consider the logistics of sending goods from Ondo State to Lagos—a seemingly routine business operation. Unfortunately, it’s not uncommon for drivers to deviate from the route, siphoning off portions of the cargo, and reducing the profit margins. Similarly, assigning field managers to source produce can encounter setbacks as some may connive with suppliers, resulting in fraudulent practices. These experiences contribute to a hesitancy among small business owners to establish more comprehensive systems, often rooted in the reluctance to entrust critical responsibilities to others.

Yet, despite these challenges, young entrepreneurs entering the agribusiness space must recognize the inherent value of growth and sustainability through systematic structuring. While theft or fraudulent activities by untrusted employees might incur losses, the benefits of instituting robust systems far outweigh these costs.

Building an effective internal control system not only safeguards against certain leakages but also curtails the limitations imposed by micromanagement. Overreliance on controlling every aspect not only restricts employees’ creativity but also stifles the potential for company growth.

The key lies in striking a balance—establishing systems that protect against vulnerabilities while fostering an environment that encourages innovation and growth. Aspiring agribusiness entrepreneurs must understand that the long-term gains derived from building sustainable systems outweigh the short-term losses incurred from mistrust or minor theft. This approach not only fortifies the business against risks but also propels it toward scalable and sustainable growth in Nigeria’s competitive business landscape.

4.0 OVERTRADING

Overtrading is essentially when a company invests excessively in its working capital. This working capital primarily includes inventory, receivables, and payables. In the context of the cocoa industry, this tendency toward overtrading manifests in various ways.

Firstly, the allure of interest-free funds from off-takers often leads brokers to accept exorbitant amounts, surpassing their operational capacity. As a result, they struggle to fulfill these commitments, leading to delays and difficulties in delivering the agreed-upon cocoa beans. This erodes trust and confidence with the off-takers, impacting future dealings and potentially hampering access to necessary funds.

Moreover, on the receivables side, new entrants in the market often extend substantial advances to suppliers in a bid to establish their presence and attract business. However, this practice can backfire, resulting in bad debts and diminishing available capital for trading purposes. To mitigate these risks, it’s crucial to not only build relationships but also assess suppliers’ capacity to deliver before offering significant advances.

Overtrading, beyond damaging relationships and reducing available capital, can precipitate various other problems for a business. It can strain cash flow, leading to liquidity issues and financial instability. It may also burden the company with excessive debt or tie up resources in unproductive ventures, hindering overall growth and scalability.

Ultimately, avoiding overtrading necessitates prudent management of working capital, maintaining a balance between investments and operational capacity, and conducting thorough assessments of financial risks before extending significant advances or commitments. This approach safeguards against cash flow disruptions, sustains healthy relationships, and fortifies the business for sustained growth and stability.

Agosile Akinjide Dickson

Principal Financial Analyst, Vicago Nigeria Limited