There is this general notion that 90 out of every 100 SMEs die within the first 5 years of their formation, while 9 out of the remaining 10 start winding up after year 5. While the source of these widely publicized statistics may be unconfirmed, the fact remains that small businesses struggle to survive in Nigeria.
According to the National Bureau of Statistics, small and medium-scale enterprises (SMEs) in Nigeria have contributed about 48%, on average, to the national GDP in the last five years. Totalling about 17.4 million enterprises, they account for about 50% of industrial jobs and nearly 90% of activities in the manufacturing sector, in terms of the number of enterprises. PWC’s MSME survey report for 2020 indicated that 99.8% of businesses in Nigeria are SMEs, while 84% of total employment in the country is contributed by the sector. These statistics are a testament to the importance of the SME sector in Nigeria, just like in every other economy.
But despite their relevance to the economy, SME businesses still struggle to survive and are more susceptible to winding up than big corporations. There are two categories of challenges that inhibit the going concern of SME businesses, and these are systemic and non-systemic challenges. Systemic challenges are problems imposed by the system that affect all players in a particular industry. For instance, poor power supply is a systemic problem for all businesses in the manufacturing sector; it affects everyone. On the other hand, the non-systemic problems relate only to a particular SME business and may not be experienced by other businesses in the same industry. For instance, high staff turnover, poor working capital positions, and poor marketing strategies 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.
I have identified five non-systemic problems that cause the failure of SME businesses and which every business owner must take cognizance of.
You often hear advice such as, You are a good cook; you should do well in the 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 broad fundamental functions: operations, marketing, and finance. While structured organizations have the capacity to employ competent people to perform these critical functions, SME businesses often rely on the astuteness of their business leaders to perform these functions.
While passion is important in running a business, a proper understanding of bookkeeping and financial management is a significant factor in building a sustainable business. Every business owner must know his company’s key financial data, such as the value of receivables, current inventory level, monthly revenue, monthly profitability, business net asset, balance sheet size, etc. It is advisable for SMEs to 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.
Business owners must be passionate about their data. Players in a game play differently when there is a scoreboard. Your financial records represent the scores of your business. The pressure to drive your team to improve your business performance will be spurred by a regular review of your key financial indicators.
2. “Grow Fast” syndrome
It is a good thing for businesses to grow, but growth should be pursued only when the business has the stamina to withstand shocks because businesses assume more risks as they grow. When you pursue growth aggressively at the early stage of your business, it may put a lot of pressure on the finances and operations of the business. Patrick Bet- David wrote in his book, Your Next Five Moves: Master the Art of Business Strategy, that businesses die for two reasons: either they grow too fast or they fail to grow at all.
I am a strong proponent of business growth. Of course, a lot of benefits come with scale. But my concern is for inorganic or forced growth. Growth that is forced on the business will not last. Entrepreneurs must be able to track and manage their growth process so that they do not lose the essence of the business in the course of pursuing growth.
From my experience as a small business lender, the best time for small and medium-sized businesses to start pursuing growth is after the business has survived its storming stage. At that time, business leaders would have been masters in the business. They would have experienced the peak and trough of that business, so they know what could trigger a crisis in the business. At this point, you will be able to manage your business growth more carefully.
3. Overexposure to loans
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 understanding of what you need the loan for, the type of loan you actually need, and how long it will take the business to repay the loan. It 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 over the business and invariably will not be entitled to a share of profit or capital appreciation. However, a bad debt is an albatross in the neck of an SME business, as it can lead to its winding up. Creditors are one of the stakeholders who are allowed by law to seek the winding up of a defaulting business.
I need to emphasize here that I am a strong proponent of growing businesses with debt due to the many advantages that debt capital offers. However, business owners must ensure the judicious and shrewd application of debt in order to optimize its value in the business. Businesses borrow to grow. Hence, if borrowing does not grow your business, there will likely be a challenge in repaying it.
4. “One-man business” mindset
The objective of every business owner should be to take his business to the next level. Sweet Sensation, one of Nigeria’s foremost fast food restaurant chain businesses, started in a shed in the backyard of the founder’s family home over 25 years ago. Today, with several outlets in Lagos, the business has definitely acquired a life of its own and is 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 so myopically that they remain just “one-man” businesses after several years of operations. If, after a 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, grit, and drive might have been sufficient to start and grow the business, but scaling it requires the contributions of other stakeholders.
Institutionalizing your business isn’t really synonymous with being big. It simply means you have created an efficient organizational structure and processes that guide all activities in the business. Your business structure and processes are the foundation upon which your business can grow.
5. A strong business model
Business models serve as the foundation for how organizations develop, deliver, and seize value. A company’s business model, said simply, demonstrates how it adds value for its intended clients and how it is compensated for doing so.
Since it outlines their value proposition, revenue sources, target market, competitive edge, and growth potential, a well-designed business model is crucial for entrepreneurs. It acts as a strategic road map, directing the distribution of resources, risk assessment, and decision-making. A solid business plan raises the likelihood of company success, draws in stakeholders and investors, and helps entrepreneurs grow and adapt in a changing market.
A lot of small enterprises don’t have strong or coherent business models. A company cannot stand out from its competitors without a clearly defined model. As a result, there is very little chance that this kind of firm will expand because no one will be persuaded to invest in it.
Written by
Sola Adeyiga
CEO at CreditPRO Business Support Services Ltd.
