Managing Business Failures in Msmes

Managing Business Failures in MSMEs

By

Ayodele Aderinwale, MFR

Project Director, Entrepreneurship Development Centre, Lagos

Paper Presented at the Central Bank of Nigeria

6th Annual Microfinance Conference and Entrepreneurship Awards

Tuesday 7th and Wednesday 8th February, 2012

Sheraton Hotel and Towers, Abuja

Introduction

The last three decades or so have seen economic policy makers in the developing world aggressively turn to the promotion of entrepreneurship as a strategy to deal with the challenges of growing unemployment and poverty. From Africa to Latin America and Asia, Micro, Small and Medium Enterprises (MSMEs), otherwise called small businesses, have become the pillars of growth in many economies. For instance, small businesses are believed to account for Taiwan’s fast growing economy. Recent data estimates noted that Taiwan currently has a total of over 1.2 million small businesses which altogether produces an export value of US$49.3 billion and contribute to 17% of Taiwan’s overall exports.

As is the case in many emerging economies, the growth of Taiwan’s SME sector is the result of deliberate government intervention. Indeed, several government policies and programmes have been designed with a clear objective of encouraging and supporting people to own businesses. The result has been a significant growth in the number of businesses in the country. According to the International Finance Corporation (IFC), 96% of Nigerian businesses are SMEs. Nigerian SMEs also represent about 90% of the manufacturing/ industrial sector in terms of number of enterprises.

Despite these impressive figures, policy makers are concerned that Nigerian small businesses contribute only about “1% of GDP compared to 40% in Asian countries and 50% in the US or Europe”[1]. It’s therefore imperative that we understand the DNA of SMEs in Nigeria, its characteristics and the various critical success and failure factors.

SMEs in Nigeria

The concept of small-scale business varies from one country to another. In Nigeria, the concept of small and medium scale enterprises have often be defined based on the volume of the business capitalisation, number of staff, sales volume, cost of assets and various other criteria.

Center for Industrial Research and Development (CIRD) of the Obafemi Awolowo University, Ile-Ife, according to Obitayo (1991), defined a small - scale enterprise as an enterprise with a working capital base not exceeding N250, 000 and employing on full time basis, 50 workers or less. The Nigerian Bank for commerce and Industrial (NBCI) adopted a definition of small - scale business as one with total Capital not exceeding N750, 000 (excluding cost of land but including working capital).

The Federal Ministry of Industry's guidelines to NBCI defined a small - scale enterprise as one with a total cost of not exceeding N5000, 000 (excluding cost of land but including working capital). The Nigerian Industrial Development Bank (NIDB) defined Small - Scale enterprise as an enterprise that has investment and working capital not exceeding N750, 000, while it defined Medium Scale enterprises as those operating within the range of N750, 000 to N3m. In 1979, the central guidelines to commercial banks, stated that, Small - Scale enterprises were those with annual turnover not exceeding N5,000, 000, while the merchants banks were to regard Small- scale enterprise as those with capital investment not exceeding N2m (excluding cost of land) or with maximum turnover, of not more than N5m. According to the guidelines provided by the Bankers’ Committee’s Small and Medium Enterprises Equity Investment Scheme (SMEIS), small and medium enterprise were defined as any enterprise with a maximum asset base of N1.5billion (excluding land and working capital), and with no lower or upper limit of staff.

With these varied definitions, it is therefore important to define MSMEs within the context of their contributions to the GDP noting that in our peculiar environment, we are in a dire need of enterprises with the ability to absorb the over 20% unemployed energies in the labour market, turn them in productive capacity and use that to grow the economy.

It is in this light, that this paper is emplaced within the frame of Growth Enterprises. Growth enterprises are such businesses with enhanced capacity to transform from micro to small, small to medium and medium to large scale enterprises and thus possess high employment generation quotient. They are the vast number of businesses scattered all over the length and breadth of this country, whether in service or in the real sector, providing the figures we churn out in our non-oil contributions to the national GDP annually. In most countries all over the world, high growth enterprises are more prevalent in the real sector when contribution is measured by turnover and also more frequent in services when measured in terms of employment generation.

Unfortunately, these are part of the over 1000 businesses that closed shop in Nigeria over the last 3 decades. The Michelins, the Dunlops, the uncountable textile mills and factories, the so many other companies in the service industry too numerous to mention. In 2009, the Manufacturer's Association of Nigeria (MAN) published that a record 834 industries closed shops in 2009 alone!

So for us to understand how to manage the incidence of these failures there is a need to critically look at the causative factors influencing this high mortality rate. This way, we can begin to interrogate issues in the Nigerian MSMEs with more understanding and from an informed standpoint.

Peculiar Small Business Challenges and Failure in Nigeria

Papers and research reports abound on reason why businesses fail all over the world. Most of the findings which are quite universal are very evident within the Nigeria MSME sector.

Michael Gerber (Mar.2007) listed ten reasons why most businesses fail. These are lack of management systems; lack of vision, purpose, or principles; lack of financial planning and review; over-dependence on specific individuals in the business and poor market segmentation and/or strategy. Others are failure to establish and/or communicate company goals; competition or lack of market knowledge; inadequate capitalization; absence of a standard-quality programme; and owners concentrating on the technical, rather than the strategic, work at hand. All the ten factors are quite evident among Nigeria’s small businesses.

From a special study on why small businesses fail, Janis Pettit (2004) discovered five major factors why more than half of small businesses fail within the first four years. These factors, which are not remarkably different from those on Michael Gerber’s list, are under-capitalization/inadequate sales; lack of a big vision, lack of a clear plan; lack of focus and lack of expertise. Janis particularly stressed the word ‘Big’ in the visioning process and ‘Clear’ in the planning process. Many people get it wrong at this stage, confusing ‘Big Vision’ with ‘Starting Big’; and ‘Clear Business Plan’ with ‘Bogus Business Plan’. Many small businesses fail because of fundamental shortcomings in their business planning, which ought to be realistic and based on accurate and current information as well as educated projections for the future.

As earlier stated, these findings are global in nature but when peculiar local realities are added to the equation, then business managers in Nigeria who have managed to keep their business afloat (in most cases, not necessarily making huge margins) deserve some superman accolades. This is because running MSMEs in Nigeria is pretty difficult and I must add is not a child’s play.

The first challenge faced by most MSME operators in Nigeria is the policy and regulatory framework. The policy and regulatory framework is incoherent as exemplified in the various definitions put forward even within government circles by their various agencies. This has hampered the structure of support offered to different classes of enterprises. In most cases, bureaucratic bottlenecks make it difficult to access various interventions and support from government even when provided. In Nigeria today, the business environment stifles business growth. Policy flip-flops have cost most businesses dearly and sent several to their early death.

The World Bank/IFC in its Doing Business 2012 Report[2] ranked Nigeria 133 out of the 183 countries assessed and ranked 15 out of the 40 African countries assessed on ease of doing business particularly in the areas of business regulations which is a preserve of the government. We cannot pretend to be serious about reforming our business environment if we have appalling figures like this compared to countries emerging from wars and crisis ranking higher.

Closely related to this is the issue of multiple-taxation. The three-tier governmental structure as enshrined in the country’s constitution gives each tier of government some rights and privileges, some of which are exploited to bring small businesses under a heavy and life-threatening yoke of taxation. In Doing Business in Nigeria (2010), the World Bank Group says an entrepreneur in Nigeria makes 35 tax payments, spending an average of 938 hours per year to prepare them. Similar statistics for OECD and Sub-Saharan Africa are 12.8 payments, 194.1 hours; and 37.7 payments, 306 hours respectively. At the maiden Quarterly Seminar Series of the Lagos EDC (2011), the Lagos State Chairman of Manufacturers Association of Nigeria, Rev. Isaac Agoye stated that in Lagos State, manufacturers pay seventy percent of the sixty-one taxes, levies, fees and permits collectible by the Lagos State government, its Ministries, Departments and Agencies, Local Government and Development Councils!

Central to small businesses failure in large instances is the lack of access to finance. This is usually the case when a business starts with owners’ equity (which is quite rampant here since most business are often sole proprietorships or partnerships) and fails to get additional funds that are critical for expansion and/or modernisation of production process. That Nigeria ranked 78 out of 183 countries in terms of business credit access (see Doing Business 2012 Report) is in itself a pointer to credit constraints, and the situation is clearly below this average for small businesses, which are naturally discriminated against. The challenge opposed by this is further aggravated for small businesses by untimely disbursements and usurious interest rates which, working together, have turned into poison what should naturally have been life-lines. Furthermore, the impact of specialised development finance institutions which are expected to deliver credit at lower than market rates is yet to be felt by the mass of SMEs in the country.

When issues of Nigeria’s infrastructural deficit is added to the equation, it becomes nearly impossible to power business, transport goods and services, market products efficiently, compete fairly with other service providers from neighbouring countries just to mention a few. To run a business in Nigeria, you have to provide your own infrastructure. This alone has limited the potentials of many a business in their early stages. I need not over flog this reality.

The case of the huge human capital gap is even more compelling. For those of us who run businesses and sit on interview panel when employing staff, we will be able to connect with this more. There is an increasing dearth of skilled hands in the Nigeria labour market. Graduates who use continent and country interchangeably! Computer science graduates whose basic knowledge of IT is “browsing”! Or even a graduate of Banking and finance who was asked about his father’s occupation and answered as follows ``my father is a refrigerator’’. The non graduates and artisans is a different kettle of fish or pot of soup if you will. Indians and all sorts of technicians from foreign countries are increasingly shipped in to handle technical work in several Nigerian companies today. I have always argued that why it is true that there is a high incidence of unemployment in Nigeria, the major issue is that of structural unemployment. There are no enough capable hands to fill the spaces available. It is increasingly very difficult to get a second in command!

All these come with another very difficult challenge, the integrity deficit and total breakdown of value system. Every stakeholder in your business has an agenda. From your staff, to suppliers and in some bizarre instances, even clients. A friend of mine who recently opened a poultry farm couldn’t believe his eyes when he was told in the one week strike occasioned by the fuel subsidy, his farm supervisor had created a sharing quota for his personal consumption from the daily production due largely to his absence! This and many more experiences are what inspired my concept of Management by Being Present (MBBP). This is because running businesses in absentia particularly when such businesses are at the gestation period exposes it to all forms vulnerabilities including dishonest workers, dubious suppliers and in some instances fraudulent customers. Lack of trusted hands remains a very salient concern in Nigerian business today. Most business expansion plans are hampered by dearth of competent and honest employees.

To this must also be added the concept of Management by Wandering about the Premises (MWAP). This means that as the owner of that business you must move from section to section and oversee every single aspect of your business operation. You must poke your nose, your eyes, and your ears into every nook and cranny of your business. It may sound tough and rough but to survive in Nigeria you simply need to be like Alice in Wonderland, you have to run twice as hard just to stay on one spot.

In addition is the issue of discipline. This is very crucial and the lack of personal discipline has killed several small businesses. Personal discipline will become system wide when shown consistently over time. It is that systemic discipline that will be a major saving grace for the business. You must show discipline by the life you live and the way you conduct business.

Tied to that is the inability to show and exercise leadership. More fundamental is also our findings at the Lagos EDC.

At our Occasional Paper Series on this same topic, it was noted that the predominance of ‘necessity’ entrepreneurs over ‘opportunity’ entrepreneurs is a contributing factor to business failure in Nigeria. Most people in businesses today, see it as another source of income to augment whatever they make from other sources. Whereas a necessity entrepreneur will buckle and fall (albeit fail) at the slightest threat, an opportunity entrepreneur will always be concerned about how to maintain or expand market share. The absence of a well thought-out programme of converting necessity to opportunity entrepreneurs in Nigeria is one of the reasons for poorer small business performance (and therefore possible higher failure rate) in Nigeria. No economy will survive with a higher rate of necessity entrepreneurs.

The influx of necessity entrepreneurs comes with its own peculiar problems. As stated earlier by Pettit, the absence of a clear vision, a void meant to be filled studiously by a business plan and the eventual inability to differentiate between ‘Big Vision’ and ‘Starting Big’ has contributed to too many business failures at the Micro and Small levels. The attitude of many businesses in this category to seeking business education is also more worrisome. They are often very hostile to investments in education that can help grow their business as it is seen as expending the “income” that can be used for so many other pressing business issues. The absence of a basic record keeping abilities, business management principles and focus, personal discipline and a value system makes the transition of most of these small and medium businesses to large scale enterprises very much impossible.

How do we manage these Business Challenges and Failures in Nigeria?

Policy and Regulatory Reforms: There is a need to step up the ongoing reforms aimed at enterprise promotion in the country. Government should focus on improving the SME policy and regulatory environment by supporting basic science and technology knowledge base, providing a sound legal and regulatory structure, invest massively in its basic physical and technological infrastructures and provide financing mechanisms.

The Doing business assessment parameters on the ease of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency should be paid thorough attention to. As you can see, a carefully designed response to the doing business indices will have far reaching implication for the entire business environment in Nigeria. Government policies and plans should be followed through to avoid somersaults.

It must be noted that government’s intention must be backed by a strong political will. This is so because, we recognize that there have been several attempts at reforms in the business sector but the implementation gap is still discouraging. Agencies of government aimed at promoting business development in the country should harmonise their agenda in a way that shows coherence and shared objective and focus. Policy responses to business challenge must respond to the realities within the business environment. Interventions such as those provided by BOI, BOA, SMEDAN, NAPEP etc must be accessible to Micro, Small and Medium business owners.