The Micro, Small and Medium Enterprises (MSME) ecosystem is often referred to as the engine room of the Nigerian economy as it employs over 80% of the workforce and contributes about 49% to the Gross Domestic Product (GDP). As of December 2020, the number of MSMEs operating within the country stood at 39.6 million compared to 41.5 million in 2017, representing a 4.5% decline.
According to Investopedia, approximately 20% of small businesses fail in their first year, 50% fail within five years, and 33% make it to 10 years. These failures and eventual collapse are caused by both internal and external factors among which are poor management skills, lack of finance, poor preparation and poor knowledge of the sector and its value chain. The collapse of these businesses can be attributed to a few factors:
1) Lack of proper business planning: It is essential that a business owner has a good understanding of the business they own. This allows such individuals to be able to effectively communicate with investors and the public. A business plan provides a written-down plan of action, a road map that speaks to both a business's internal and external audience.
Investopedia outlines the most important components of a business plan as
An Executive Summary: This is a brief introduction to the business and its internal stakeholders. It also outlines the mission statement of the business.
Market analysis: This shows an in-depth understanding of the industry the business operates in, highlighting market leaders and other competitors. Market analysis also portrays the need(s) the business will be addressing.
Sales Plan: This addresses how the business plans to attract and win market share. This will also require an understanding of the business' competitive advantages and plans around modes and channels of advertisement.
Service and Product Offerings: This outlines the offerings of the business, their pricing, and their benefits to the customers
Financial Planning: This will include plans and projections for the business, and
new businesses will have to show all targets and estimates for future years.
Budget: This shows the cost attributed to each aspect of the business, including staffing, stock purchases, Operational expenses, and miscellaneous expenses.
2) Funding: In Nigerian society, many people believe the best way to fund an idea is by making use of your savings or by raising funds from friends and family. While this path may not be easy, it is no doubt a good one as little to no interest rate is charged. Another alternative is opting for loans from banks and other financial institutions.
New entrepreneurs might apply for more money than they need from a bank which then makes it harder to repay within the allotted timeframe.
Lewis, L.V. and Churchill, N.C. (1983) mentioned five stages a business ought to pass through.
These stages include the existence stage, survival stage, success stage, take-off stage and resource-maturity stage. Business owners must identify the stage in which their business is before applying for a loan. Many business owners at the existence stage take big loans from banks and other financial institutions and end up not being able to repay. It is therefore appropriate for an entrepreneur to know when to apply for loans, the types of funding available and have a funds management framework to guide how much is needed.
4) Inability to Adapt to Changes: Businesses operate in a world where consumer behaviour, needs and tastes are constantly changing. Consumers’ behaviour pre-Covid19 has drastically changed and is still changing as they settle into the new world order. There is a need for SMEs to ensure that they stay abreast of new market trends and consumer behaviours and adjust their product offerings and marketing strategy to best align with new market behaviour and requirement.
5) Lack of Sales: One of the major reasons why SMEs fail is their inability to generate constant revenue through sales of their goods and services. Nothing hurts a business faster than not being able to reach its projected sales goals to enable it to stay afloat. One of the ways that this can occur is when the business has customer concentration risk issues (a situation where too
much reliance is on a particular customer or few customers). Business owners will have to diversify their customer base by ensuring their marketing strategy is well developed to reach a vast number of their available market size.
6) Poor/Inadequate Management: This is by far the easiest thing to get wrong and the most important part of owning a business: the ability to manage both the human and material resources at a business owner’s disposal. Failure to acquire the required business acumen on the part of business owners and/or management is a pitfall entrepreneurs should avoid and mitigate.
While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees. Smart business owners outsource the activities they do not perform well or have little time to successfully carry through. In areas where the funds available are not sufficient for outsourcing, entrepreneurs are advised to register and attend management training programmes to help improve and develop the required skill.
In conclusion, business owners should be able to embrace evolution in the business world. A business owner who is not able to understand the continuous improvement and growth in the business world is at the losing end and their business will in no time go into extinction. It is therefore advisable for a business owner to identify and predict the present and future of the business world in order to understand the level of consistency, skill, knowledge, and growth that is needed to sustain the business.
Author- Gbolahan Owoeye