Enterpreneurship and investment decision

By Deji Akinso, Fellow of Chartered Institute of Bankers of Nigeria

Deji Akinso

Entrepreneurship is all about boldness, energy and invention in practical terms that one puts into a projected task or work. It is an undertaking.

It is an incentive for factors like land, labour, capital and entrepreneur to be more available for production; thus discouraging laziness, inefficiency and wastage. It encourages industry, creativity, inventiveness and efficiency.There is no way we can treat the subject of entrepreneurship without examining the factors of production.

Factors of production are land, labour, capital and entrepreneur.The entrepreneur is the major factor. It coordinates the other factors for optimum results. We can logically say that the factors of production consist of: (1)Human Resources and (2)Non- Human Tangible Resources

These resources provide the inputs needed to transform production into outputs of goods and services. What is required is the service of the factor as and whether they are actually employed will depend upon market demand for their services and the valuations of factor owners in relation to income and leisure.

Factors of production can be classified as: (1)Specific -This can be used to produce one particular type of output. (2)Non-specific-This is capable of being used for producing many different kinds of output. Further classification can be categorised as fixed and variable. Fixed factors are factors whose quantity and cost cannot be changed in the short-run. Example is machinery whose cost is constant over a large range of output.Variable factors are opposite to what we described above. They are factors whose quantity and hence cost varies with level of output. Examples are labour and material.

Peter F. Drucker in his book “Innovation and Entrepreneurship (1985)” was able to come up with the unique features that made American economy in the 1970s and1980s to be tick during the period when its counterparts in Europe and Japan were shrinking. The conclusion drawn was that the strength of the American economy was laid in the entrepreneurial activities of the small and medium businesses.

On the contemporary level, Indian economy in the 1990s and early 21st century became the envy of many developing nations and the result of this success was traced to the small and medium enterprises. Entrepreneurship is crucial to good investment decisions and is a key to the success of any country that aims at attaining viable economic growth.

Investment decisions
Investment decisions are outcome of appraisal of relevant variable which will assist an investor to make decisions whether to invest or not in a particular project or investment.

Starting an investment can be a challenging experience. It, therefore, requires careful planning and effort. Failure to do this is one of the major causes of the failure of new enterprises.

There are two basic types of investments: (1) Lending and (2) Ownership.

Lending: This is an investment in which owners of funds are not really a party to its management such as investing in stock, treasury bills, bonds, etc. In this investment type, an “investor” lends out his money to a “manager”- who harnesses it with other resources to give the investor a return in the form of dividends in case of stock and interest in case of deposit in banks.

Ownership: This is an investment in which the investor is still the entrepreneur (a major factor of production) - he harnesses all factors required for a return on his investment.

However, for the purpose of this paper, we shall narrow our investor and investment decision to ownership - investment.

When a prospective businessman has identified a product and is convinced that there is a market for it, it is assumed that a business opportunity has been identified. Identification of a business opportunity is, however, only a beginning in the process of making an investment decision.The next step after identifying a business opportunity is to determine the feasibility of the proposed investment. This will clarify whether or not the business or investment can be carried out successfully and profitably.This brings us to feasibility study as a major tool in making investment decision.

The feasibility study/report
The feasibility study involves careful thought and focuses on key issues involved in starting and operating an investment/ business successfully.

The study will focus mainly on the general background information on the economy – political and stability, government policies, infrastructure, inflation, interest rate, crime, etc, which make up the environment in its totality. This is called scanning the environment to know its viability to sustain an investment. Take for example, in an economy where the inflation rate is 16 per cent or less, this will mean zero returns or negative returns (loss) on the investment in the real terms.

Other focus of the study will include the market; the management team-who manages the investment; the location including factors justifying the choice; and the financial plan which has two aspects:
(1) Cash budget shows the cash inflow and outflow.
(2) The second aspect is concerned with longer-range projections of the investment future income.
In essence, the feasibility study enables the prospective entrepreneur to make the crucial investment decision and answers his investment decision questions of:(1) How much to invest?(2) Where to invest?(3) When to invest?(4) What are the risks involved?

Your investment goals
Many people think that a suitable investment goal is merely to accumulate the largest amount of money in the least time. All of us would love to be able to do that. But that is not a goal because it does not provide the necessary guidelines to help the investor decide what is to be done, how it is to be done and when it is to be done.Your investment plans should have a series of well-defined goals.Each goal should have two basic guidelines:

(1)Set a specific income estimate: this estimate will be one of the measures to judge your success at achieving the goal. Specify a time horizon within which you plan to achieve the goal.

(2) Specify a time horizon within which you plan to achieve the goal. To properly evaluate an investment and subsequently make a decision, an investor needs information on six criteria: Risk, rate of return, investment life, tax feature, smallest- naira amount and flexibility. Every investor or entrepreneur must decide what risk exposure he or she is willing to accept for any investment. If the focus is for a high rate return, you must be willing to accept the higher risk that comes with higher- return investments.

Investing in piggery could be highly rewarding but risky, because of its biological nature that exposes the investor to factors outside his control which he cannot predict. Rate of return simply means the rate at which an investor will recoup his money and profit putting the investing life into consideration.

There are various methods of calculating it; the commonest of them are Pay Back Period (a Straight Line Method - SLM) & Internal Rate of Return (IRR). Scientifically, IRR is preferred to SLM because it discounts the future income; thereby putting the future value of Naira into consideration. It makes provision for inflation.

However SLM is widely preferred because it is easier to calculate and analyze thereby allowing for easy decision making.

This has to do with how long it takes the investment to get to its zero value after which capital and profit have been recouped. Some investments are long-term which eventually might not get to zero value if not liquidated or bankrupt while others are short-term.

Generally, short-term investments are usually safer and better especially in a country like ours where government policies and other economic variables could be difficult to predict, thereby making future investments planning difficult.

The discussion of tax feature centers on federal income tax regulations. The most important question about taxes and investments is whether an investment’s return is exempt from federal income tax. Depending on the investment, some returns are taxable, some are not and even where returns are taxable, some portions of the returns are taxed at a lower rate.

Capital outlay
Many investments require certain minimum initial capital outlay. For example, assume an investment requires a minimum of N100000.00. Clearly, this investment will not fit the needs of someone who wants to invest N50000.00 or N100million.

Flexibility
An investment’s flexibility depends on how easily it can be converted into cash should the need arise. For example, a savings account has a good flexibility because banks generally permit withdrawals without advance notice.

Factors that affect the flexibility of an investment are price concession, transaction cost and penalties. Having reviewed these evaluation points, no one factor should be given higher priority over the other but the sum total of all the factors involved in the evaluation of an investment should always form your basis for making a decision.
On a final note, make sure you do a constant review of your investment decision.

SOURCES OF FINANCE
Money they say is the bedrock of planning. However good an investment decision is, it is of no use if there is no finance to back it. Finance is therefore crucial to the success of any investment decision. As we put in place a good investment decision, we must also source for the right finance.

Mr. Akinso is a Lagos based chartered banker.