Small and Medium scale Enterprises as described by the CBN are companies that have a staff strength of less than 300 people and/or turnover of less than N100 million. Studies by the PWC show that 96% of Nigerian-owned businesses belong in this category.
While the sheer quantity of SMEs springing up in Nigeria is quite encouraging, it is however observed by the UNIDO that only 20% of these SMEs survive beyond 5 years. Which is very unfortunate.
Below are some of the leading causes of high rate of failure among Nigerian small business.
Top 10 problems for SMEs in Nigeria and solutions
The first five problems are due to internal factors while the other five are due to external factors.
Internal Factors: These are factors that are virtually within the control of the entrepreneurs or business managers
1. Lack of clear succession plan
Most SMEs in Nigeria are sole proprietorships. It is widely observed that most founders of these businesses fail to put in place a clear plan for the successful running of the business beyond their retirement or demise. Hence most businesses tend to die along with the owner/founder.
Solution: This can be solved by grooming member(s) of the management or operation team to understudy the proprietor closely with a view to empowering them with requisite skills to run the business in the absence of the owner/founder
2. Financial literacy/irresponsibility
Many business owners lack basic knowledge of modern business finance. I.e. record-keeping, stock tacking, how and when to source for funds, how to leverage on assets to obtain loans appropriately, liquidity management, tax policies etc.
Solution: Domain knowledge of the line of business alone is not sufficient to sustain the long-term viability of an enterprise.
Business Owners need to take out time to seek adequate knowledge of corporate finance by attending relevant seminars/crash courses.
3. Lack of proper strategic planning
The two main drivers of entrepreneurship are profit and passion. However important they may be, these factors are very dicey as they often prevent business owners from seeing the bigger picture. The business ecosystem is very diverse and complex. It requires proper strategic planning to hedge against various risks that may come up especially in the long run.
Solution: It is imperative that entrepreneurs, before starting a businessbu, look beyond the bottom line/profits or the passion they have for it. They make objective observations to access risks and develop a fool-proof strategy and plans to ensure long-term sustainability.
4. Disregard for Essential Services i.e. Insurance/Legal/Professional Services
SMEs in Nigeria generally tend to disregard the importance of the aforementioned services which leaves them one unfortunate incident away from complete ruin.
Solution: SMEs must understand the significance of essential services such as Insurance, Legal Representation and Professional Services (Audit, Tax, Business Advisory).
They are non-negotiable for any business that seeks to grow and thrive. They offer protection from business risks, fraud and other operational failures that may prove fatal to the business.
External: These are macro-economic or structural factors that are often outside the purview of SME owners/managers.
5. Fluctuation of Forex
International trade contracts are largely denominated in dollars. Hence, the lack of stability of the Naira makes Nigerian SMEs shortchanged in International trade. This especially affects companies that depend on imported raw materials or wares for further production or re-sale respectively.
Solution: The CBN must device plans to keep the Naira stable against the dollar.
Nigerian SMEs are still being plagued by poor basic infrastructures, such as power supply, road networks, water supply, and waste disposal. In many cases, business owners often have to carry out capital intensive public projects by themselves in order to have access to these essential amenities.
Solution: Government needs to put in place an enabling environment for businesses to thrive.
7. Intimidation by Regulatory Authorities
Another challenge that business owners complain bitterly about is the constant intimidation and extortion by regulatory bodies who sometimes abuse their office to make quick money by extorting business owners, and sometimes inordinately inhibiting the smooth run of their business operations despite not breaking any laws.
Solution: Government needs to put in place better checks and balances in the formation and operation of regulatory bodies.
8. Bad Policies
A common feature of the business ecosystem of most developing countries such as Nigeria is unfriendly government policies which many SME owners often notably describe as conflicting, stifling and inconsistent. A typical example of this was the sudden ban on bike-hailing service companies by the government of Lagos state. The arbitrary manner in which these policies are often enacted, without proper consultation or notice goes a long way to kill business and further discourage Investor confidence.
Solution: The government needs to make proper consultations before enacting policies that may undermine the operations of the business in the country.
9. Insecurity/Political Instability
Insecurity has continued to ravage the northern part of Nigeria over the last 20 years. Asides from the fact that insecurity displaces people from their settlements and reverses economic development of the affected states, many SMEs across the country depend on raw materials that are majorly sourced from these affected-regions such as food items.
Insecurity has greatly hampered the free movement of wares and personnel from the troubled states. The negative impact of this on the fortunes of SMEs cannot be over-emphasized.
Solution: The government must find an effective and lasting solution to the various cases of insecurity across the country in order to create a favourable atmosphere for SMEs to thrive nationwide.
10. Access to Capital
It is quite difficult for Nigerian SMEs to access credit facilities because the loan conditions are often too stringent for SMEs to meet. Hence some of these companies find it difficult to expand their operations and enjoy economies of scale. Despite a profitable business model some SMEs wind-up due to mere liquidity issues.
Solution: The government needs to make funds, loans and/or grants available to SMEs.
A friendly business environment should also be created to encourage international Venture Capitalists and Angel Investors to participate in the Nigerian economy. The goal is not only for more SMEs to spring up but to see them thrive, operate sustainably, profitably and grow into world class companies and unicorns.