Startup businesses all over the world are experiencing a boom in various industries ranging from manufacturing, transportation, hospitality and even the financial industry. In Nigeria, there has been a significant increase in small businesses. It is also important to note that small businesses make up a very large portion of the Nigerian economy. Startups have influenced innovation and contributed to the economy in various industries. The Founders of such business in Nigeria focus on creating innovative ways of providing solutions to perceived problems while relying heavily on the use of technology. Nigeria, being an emerging economy, provides a viable market for startups to thrive. Despite all these, research has shown that only 30% of startups will make it to their tenth year based on several reasons. Some of such failures range from wrong business model to no market for the product, poor financial management, ignoring tax compliance etc.
This article, however, focuses on problems resultant from a poor understanding of financial and tax management for startup businesses in Nigeria. Most times, startups fail to keep proper financial records of their business from inception. The Founders focus primarily on the product and market development but fail to understand the underlying financial flow of the business. This is key to the success of the financial and tax management of the business. Owners of these businesses fail to see financial and tax management as a tool necessary to build the foundation of their businesses. Thus, they do not allocate adequate and sufficient resources to bookkeeping and finance department.
Importance of Financial and Tax Management
Most startups rely heavily on investors, whether Angel investors or Venture Capitalist (VC) in raising funds to develop their products and services, grow their business and limit their investment risk in series of investment rounds. However, Investors majorly depend on Financial Statement (FS) to determine whether the business is viable for investment. Therefore, startups must keep records of all transactions which will be analysed into reliable and meaningful financial information for investors to make the decision.
Proper financial management also provides sufficient information to help startups determine their tax liabilities and implement a favourable tax plan for their business. Often times, most startups fail to comply with tax laws and regulations largely due to the lack of financial information. Some others even fail to register for federal and state taxes. As the business continues to grow with a huge profit, the businesses are exposed to large tax liabilities and penalties, which may eventually cripple the survival of the business.