By Timi Olubiyi, PhD
Despite the significance of small and medium enterprises (SMEs) to the economy and national development, Africa has a high rate of business failures and short-lived businesses.
In Nigeria SMEs account for 48 per cent of the national gross domestic product (GDP), 96 per cent of businesses, and 84 per cent of employment in the country, according to a PricewaterhouseCoopers (PwC) report.
In contrast, due to the country’s dire economic circumstances, at least 1.9 million SMEs have been lost since 2017, according to the report, yet business closures persist at an alarming rate.
Why do so many businesses fail so quickly, be they structured or unstructured? It can be attributed to many challenges, and this is the focus of this piece.
In the context of this article, the word “failure” refers to any kind of closure, including bankruptcy, liquidation, stopping further losses, giving up and starting a new business, and/or closing by choice (like retiring early or shutting down).
According to the author’s observations, small businesses, especially those with one to nine staff, are prevalent, mostly unstructured, and largely operating informally throughout the country.
Convenience shops and grocery stores, dry cleaning and laundromat services, taxi services, trucking and transportation businesses, beauty salons, local restaurants, and several other small businesses operate with no data sets or registration databases.
For instance, in Lagos State, most of these small businesses are overwhelmingly dominated by people moving in from other states of the country, largely due to the fact that barriers to entry into the business ecosystem are low, and there is no compulsion for registrations or certifications, and the start-up capital is usually low.
The worry is that many of these business operators are inexperienced and pay no attention to business structure, technology, skill sets, accountability, or the importance of business continuity. Therefore, business failures keep getting worse without any known help.
In fact, it is hard to see how the sector can make a big difference or impact in creating jobs, growing the economy, and reducing poverty. Business failure is the last stage of the business life cycle. However, it is so prevalent that it happens within the first five years of a significant number of SMEs in Nigeria and the rate is alarming.
Even though the environment is a key part of how easy it is to do business, it is still harsh and hard in the country, with or without post-COVID-19 consequences. Truly, there are many problems with the economy’s supply chain and infrastructures, such as the price of diesel, problems with the foreign exchange market, and regulations that hurt businesses.
Many of the business failure factors are frequently categorized as “poor management or lack of access,” though the failure predictors are in two broad categories: internal factors (controllable) and external factors (uncontrollable).
Without a systematic outline and identification of the many challenges faced by small businesses, here are the most common business failure factors in the country that operators need to pay attention to low quality or low level of education and qualification of operators and workforce; lack of manpower, loss of seasoned personnel and management due to social mobility and relocation (Japa), resulting in skill shortages within the business and inability to attract and retain new highly qualified personnel; lack of an appropriate corporate governance structure and organogram in the case of the few structured SMEs; Customer dissatisfaction due to a low product or service quality; poor customer experience and declining patronage.
A variety of funding issues are also relevant to business failures, including no or low business capital or profitability, revenue erosion (in some cases referred to as undercapitalization), insufficient cash flow or cash reserve, and excessive reliance on borrowed funds (high leverage).
Poor accounting practice, teeming, and lading can also result in business failures. The absence of adequate marketing channels, poor market knowledge, outdated services and products, and not being in touch with customer needs (for illustration, dealing in Nokia 3310-related accessories or phone sales when the market demand is for Android phones).
Poor and negative customer relations; poor pricing techniques; lack of innovative drive, ignoring product or service innovations and new ideas; ignoring competitors’ pressure and offerings; resource mismanagement; undue family influence and control in the business operations can kill businesses.
Further to this, poor internal communication, lack of free flow of business information, and fraudulent acts by employees, including legal tussles, can also be contributory to the failures.
Others are ineffective and reckless leadership tendencies, a high cost of running the business, huge overhead, and an inability to control expenses, inappropriate response to new external and/or internal challenges, lack of strategic and business planning (competitor analysis, marketing analysis, risk analysis, opportunity and threat analysis). under-estimating or over-estimating risks in the marketplace, among others.
There is also the failure to recognise and capitalise on new market opportunities, intense competition, and adherence to ineffective competitive formulas or strategies. Another is being outwitted by competitors or even former employees; and relying too heavily on one or a few clients’ patronages are also attributable.
Leadership tussles and conflicts within management, business owners, and/or power struggles cannot be ignored. Failure to provide value for money can make customers disgruntled and avoid patronage.
Poor inventory management, and failure to differentiate products and services in a highly competitive environment. and the strong bargaining power of buyers can cause business failure. In the era of globalization, e-commerce, and high adoption of technology, any old equipment, machinery, or technology issues can make a business fail. Low or no online visibility, inadequate technological adoption, or failure to take advantage of new technological advances can also adversely affect businesses.
Largely unforeseen mishaps can happen, failing to learn from this or one’s errors, and the repetition of such errors and poor decision-making can have huge consequences. Overlapping responsibilities in the case of one-man businesses where the owner claims to be an expert in all departments and business functions can make the business fail. Where there is no distinction between ownership and management and there is an excessive concentration of authority, including excessive administrative rule imposition on subordinates and employees, it can ruin a business.
From the government side, unanswered macroeconomic challenges, economic instability, multiple taxation, no ease of doing business, regulatory hurdles and multiple permits, and a harsh economic climate are just some of the negative factors. Poor infrastructure, bad roads, erratic power supply, limited access to government grants and support, and much more, particularly power and the cost of generating alternative power are also some factors.
Further to this, the rising costs of doing business, inflation, irregular policies, the judicial system where disputes linger for several years, and political influence and interest, including corruption, are all part of the factors attributable to business failure.
Even common macroeconomic factors like recessions, insecurity, government debt, exchange rates, and high-interest rates, are just a few. The power (electricity) situation in Nigeria has been a great cause for concern for businesses, investors, and citizens at large and is equally significant in the overall performance of the economy.
These infrastructure gaps and weak macroeconomic factors can be blamed on the depressed economy and prevalence of business failure in Nigeria. The turn-around time at the ports, and congestion on the roads, are all imperative causes of business failures in the country and cannot be controlled by entrepreneurs and SME operators.
Consequently, it poses a big risk to businesses unless the government intervenes decisively and gives the needed policy responses. This is the big prayer of all SMEs and entrepreneurs in the country.
Above all, the culture of not seeking expert opinion, advice, and consultation for problem-solving is the overall bane of SME operators or owner-managers.
One or more of the above-mentioned factors are warning indications of business failure. SMEs must pay close attention to these indicators as soon as they appear, in order to avoid a crisis. Maintaining an appropriate structure, adequate capital, and having contingency plans are some of the best strategies to control and reduce business failure that these factors can cause. Further prerequisites for small business success may just be the next article from the author. Good luck!
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Dr Timi Olubiyi is an Entrepreneurship & Business Management expert with a PhD in Business Administration from Babcock University Nigeria. He is also a prolific investment coach, author, seasoned scholar, Chartered Member of the Chartered Institute for Securities & Investment (CISI), and Securities & Exchange Commission (SEC) registered capital market operator. He can be reached on the Twitter handle @drtimiolubiyi and via email: firstname.lastname@example.org, for any questions, reactions, and comments.
The opinions expressed in this article are that of the author- Dr Timi Olubiyi and do not necessarily reflect the views of others.