About 90 out of every 100 Micro, Small, and Medium Enterprises (MSMEs) in Nigeria die within their first five years of formation, while nine out of the remaining 10 start winding up after five years.
This is because Nigerian small businesses struggle daily with numerous challenges to survive.
SMEs are the engine of growth in many economies. MSMEs contribute 50 percent to Nigeria’s GDP and accounts for 86.3 percent of jobs (59.6million jobs in 2017), according to a report by the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).
Africa’s biggest economy currently has 41.5million MSMEs that account for about 50percent of industrial jobs and nearly 90percent of activities in the manufacturing sector.
PWC’s MSME survey report for 2020 indicated that 99.8percent of businesses in Nigeria are MSMEs while 84 percent of total employment in the country is contributed by the sector.
These statistics are testament to the importance of MSMEs to the country’s economic growth and development.
But despite their relevance to the economy, small businesses are constantly being pushed to the brink as credit and FX crunch, including poor infrastructure, continues to hit them hard.
There are two categories of challenges that inhibit the going concern of SME businesses and they are; Systemic and Non-systemic challenges.
The systemic challenges are problems imposed by the system, which affects all players in a particular industry.
For instance, poor power supply is a systemic problem for all businesses in Nigeria. On the other hand, the non-systemic challenges relate only to MSMEs that operate in a particular industry.
For example, high staff turnover, poor working capital, poor marketing strategies among others are all non-systemic problems.
For a company to survive the challenging world of business, it must be able to manage its non-systemic problems considerably, according to experts.
They have identified four non-systemic problems that cause the failure of SME businesses and which every business owner must take cognizance of to increase their survival rate.
Poor knowledge of financial management
You often hear advice such as you are a good cook; you should do well in a restaurant business. This suggests that doing business requires only passion and skills. But the question is; why do businesses run by people who are passionate and technically sound still fail?
Every business has three fundamental functions: operations, marketing, and finance. While structured organisations can employ competent people to perform these critical functions, small businesses often rely on the astuteness of the leaders to perform these functions.
Also, a fair understanding of book-keeping and financial management can affect the fortune of your business. Every business owner must know his company’s key financial data such as values of receivables, current inventory level, monthly revenue, monthly profitability, business net asset, and balance sheet size among others.
SMEs should subscribe to cloud-based accounting software which is largely affordable and easy to set up. With your transaction records properly updated on the accounting software, you will have a better overview of the financial condition of your business.
The growing fast syndrome
It is good thing for businesses to want to scale, however, growth should be pursued only when the business has the stamina to withstand shocks.
When you pursue growth aggressively at the early stage of the business, it puts a lot of pressure on the finances and operations of the business. Business growth is more sustainable when it is organic.
I am a strong proponent of business growth; of course, a lot of benefits come with size. But my grouse is inorganic or forced growth. A growth that is forced on the business will not last.
From experience, the best time to start pursuing growth is after the business has survived its storming stage.
At that time, you would have learnt, unlearn and relearn. You would have experienced the peak and trough of that business so you know what could trigger a crisis. At this point, you will be able to manage your business growth more carefully.
Over-exposure to loan
As an offshoot of the point above, too much bank debt especially at the early stage could be inimical to the going concern of a small business.
Too much gearing puts a business under pressure. As an SME, before you approach a bank for a loan, the capacity to repay must be ascertained. You must have a clear-cut understanding of what you need the loan for, the type of loan you need, and how long it will take you to repay the loan. You must be clear if the incremental income will be enough to cover the interest cost on the loan.
Debt is cheaper than equity since the debt provider does not have any control in the business and invariably will not be entitled to a share of profit or capital appreciation in the business. However, bad debt is an albatross in the neck of an SME business as it can lead to its winding up.
‘One-man business’ mindset
The objective of every business owner should be to take his business to the next level. Sweet Sensation started from a shed in the backyard of the founder’s family home over 25 years back. Today, with several outlets in Lagos, the business has acquired a life of its own and surely independent of its founder. That is a typical case of institutionalizing your business.
Many small business owners fail to look beyond their immediate levels. They run their businesses myopically that it remains just a ‘one-man business’ after several years of operations. If after few years in business you still don’t have a competent and stable team handling key functions for the company, if all decisions are still taken by you alone and key decisions cannot be taken when you are not around, then the going concern of your company is at risk. Your skills, guts, and drive might have been sufficient to start the business, but scaling it requires the contributions of other stakeholders.
Institutionalizing your business isn’t synonymous with big size. It simply means you have created an efficient organisational structure and processes that guide all activities in the business. Your business structure and processes are the foundation upon which your business can grow. You can contact Sola Adeyiga, CEO, CreditPRO and writer of the article on [email protected] or visit www.creditprosme.com. CreditPRO is an SME focused lending company.
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