• Saturday, June 15, 2024
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Recovery: Ending the lip service to cost containment in Microfinance (2)

Primera Microfinance Bank Records Impressive Half-Year Performance

We conclude the discussion of cost containment today. The idea of costs, and how to keep them in check, is age-old but still very hot and trending. The pandemic has claimed many lives and wrecked the global economy. Close to 20 million people have been infected and the daily rate of new cases is put at about 250,000. In Nigeria, the challenge of balancing health and economic security is still in the front burner, with the citizens divided between full reopening of the economy and the current partial lockdown.

Clearly, the pandemic is not going away in a hurry, and even if it does, its impact will be with us for at least the next half a decade. Over much of this period, revenues are not going to return to pre-COVID 19 levels, especially in the near term. At best, they will begin to crawl back up but very gradually.

Clearly, for as long as the lockdown continues, things will remain difficult and cash flows will not return. Unfortunately, costs do not get locked down, and they don’t go south in a hurry. If anything, costs tend to rise with the lockdowns as avoidable costs, like continuous use of generators and itinerant trips to the kitchen, happen more often when people are locked up at home. In good times, people are busy in the office or on the road. Many people, out of the lack of time and work pressure, do skip some meals in a day. They may not have time for lunch and may nibble on whatever they find in the office.

However, once locked down, every meal becomes unavoidable. People even do more than three square meals a day, just because they are close to the kitchen, and the fridge in the bedroom has become a regular place to visit. These events are simply an invitation to cost escalation, and reinforce the urgent need for cost containment.

We can reduce it by a deliberate pursuit of low cost funds, relative to expensive term deposits. A good segmentation of the market and blending of high and low cost deposit liabilities could help in this regard

Working smart, and skipping all avoidable costs, should be the guiding principle of all entities, public and private, at times like these. Recently, one of the federal agencies in the aviation sector claimed to be paying N1.5billion as staff salaries every month. Of course, in Nigeria, people get paid for staying at home, and this culture continues to be on display even as many workers stayed at home. It is likely that many organisations not only keep paying basic salaries, they also paid transport and lunch allowances. I bet you in organised systems some of these allowances will go, even if you have to return it to the people by another name – say palliative.

This is how they get money to support those out of job in the form of unemployment benefits. The burden of the high wage bill was worsened by the pandemic as no cash was coming in. The question is: who are the workers in this agency knocking out N1.5billion a month as salaries, even in a pandemic lockdown? How many of them are real workers, and how many are ghost workers included in the payroll by the top executives of the company? In Nigeria, all you hear is that an agency has cleared all the ghost workers in the payroll but nobody ever asks the critical question: how did the ghost worker obtain the relevant documentation needed to get on the payroll in a government department. Isn’t that curious if not strange? Since we cannot punish ghost workers, it makes a great deal of sense to fish out those who put them on the payroll. It’s wrong to just eject the ghost and leave the guide that showed it the way into the payroll.

As for operators in the microfinance sector, cost containment should be a way of life. Operating in an environment of virtual absence of functional public infrastructure, and also dealing with the neediest group in the society, should never be mistaken for a tea party. Cost centre managers must therefore understand the dynamics of effective cost containment. There are five elements to manage, if costs are to be kept under effective control. First is to avoid impulsive spending. Managers must make sure every project, for which resources must be allocated, must get into their spending plan. Projects must be clearly identified before costs are incurred on them.

Resource planning helps an organisation to get a handle on its costs. This is why entities make budgets. It enables them to establish the need for a particular cost item. Once a need has been properly established, the next important thing to do is to estimate the approximate resources to be expended on it. Based on the established need for a project and the estimate of costs attaching to them, a budget will be drawn up. Spending is usually controlled by budgets, which help to keep things in focus and in relation to revenue.

Allocating costs to budgets creates a new responsibility: the need to keep an eye on the cost to ensure it behaves according to plan, and to correct any inconsistent movements in it. Cost control is an important activity in cost management. Effectively handling these four elements of cost management will slow down the tendency of costs to run away from plans.

Accordingly, operators must do all of four things, including reviewing and ensuring that they are operating with the most appropriate business model. The model in use has impact on cost and efficiency in microfinance because it impacts on staff numbers and relevant efficiency ratios. They must also deliberately focus on cost of funds with a view to reducing it drastically. Banks buy and sell money, essentially, and profit is the difference between cost of sales and revenue from sales. Interest expense is a key element of the cost of sales.

We can reduce it by a deliberate pursuit of low cost funds, relative to expensive term deposits. A good segmentation of the market and blending of high and low cost deposit liabilities could help in this regard. Improved risk profile will put a downward pressure on costs, even from the point of view of premium paid for deposit insurance, Cost segmentation is also very important because it allows operators to focus only on the most important costs. Frills and unnecessary costs are to be avoided including new branches and equipment that are not immediately needed. Capital projects add to the capacity of the entity to produce more income and hence profits. However, they are not to be embarked upon when cash flows have vaporised and a lockdown is in force.