By Timi Olubiyi, Ph.D.
The high failure rate of start-ups and SMEs in Nigeria, give a bleak picture of the sector’s potential to contribute significantly to job creation, economic growth and poverty reduction.
The big question is why do businesses fail so easily? This could be adjudged to the fact that most of the SMEs especially the micro-businesses are unstructured and operate informally in the country.
Nonetheless, when these businesses are in the failing path, the entrepreneur or SME operator is unaware of it happening, until it is often too late.
The survival of SMEs is even a bigger worry this time because of novel coronavirus (COVID-19) related negative impact, harsh business environment, insecurity among others.
With the pandemic, virtually every aspect of our lives is affected, with a significant adverse impact on trade, investment, business sustainability, and employment generation.
The primary objective of this article is to present the causes and predictors of the failure of these SMEs in the country.
In the context of this article, the term failure means any form of closure, either through bankruptcy, liquidation, prevention of further losses, abandon and re-starting another business, and/or due to personal choice (such as early retirement).
Small businesses in the context of this article is defined based on the number of employees in a business entity. Therefore, small and medium enterprises (SME) is a business employing 1 to 200 persons.
However, micro business is defined as entities employing 1 to 9 persons and small businesses employ 10 to 49 persons. In a similar vein, medium enterprises are businesses employing 50 to 199 persons. All businesses that employ from 200 persons and above are termed as big or large enterprises.
It is imperative to state that business failure is the last stage of an organization’s life cycle. The failure of SMEs or any business organization is an event which can produce substantial losses to creditors, stakeholders, and/or stockholder.
While there is multitude of conditions and reasons that can result into business failure, the key predictor of SMEs’ failure and death of businesses is the business environment.
Nigeria, like most African countries, lack basic infrastructure and action plan for businesses to thrive conveniently and the environment is a harsh one for businesses especially start-ups.
Even though small and medium-sized enterprises (SMEs) have been proven to be a catalyst for economic development in countries all around the world, this is not entirely the situation in Africa, including Nigeria.
Sadly, the prevalence of business failure usually impacts negatively on national development and growth of any nation.
The prevalent business failure in Nigeria could be one of the major setbacks to economic growth and high unemployment rate in the country.
Records reveal that SMEs are the largest employers of labor globally and if this vital sector suffers failure predominant, then the level of unemployment in the country might not abate.
From observation around, especially in Lagos State, the economic nerve center, and SME hub of the country, only a fraction of new businesses survives for the first five years and only one-third of new businesses can survive for 10 years.
According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months, which is a whopping 80 percent business failure rate.
In addition, it is estimated that the failure rate of SMEs in Nigeria is as many as 80 percent within the five years of operation, according to findings of Stanbic IBTC.
Experts also corroborate these assertions, saying about 80 percent of Small and Medium Enterprises (SMEs) in Nigeria fail within the first five years of their existence due to lack of experience and other wrong business practices.
The anticipated catalyst to this high rate of business failure in Nigeria is the COVID-19 pandemic with the current realities.
We are likely to witness an extremely high post-pandemic business shut down, job loss, and a persistent decrease in outputs and revenue expectations of SMEs in Nigeria.
However, government can do more by rolling out measures to support this SMEs especially through the COVID-19 disruptions.
With government intervention, high number of business failures can be forestalled because the pandemic is already impacting negatively on distribution and supply chain of businesses.
Nonetheless, even though the environment is a critical factor in the ease of doing business, a harsh and difficult one exists in this country with or without COVID-19.
Government action plan and focus is imperative to develop this sector which is widely accepted as economic growth driver.
Recently, a survey conducted on small business in Lagos State indicated that the failure predictors is in two broad categories, namely internal or managerially controllable causes and external or non-controllable causes.
The internal factors the participants of the survey cited are (1) Financial resources like funding inadequacy, lack of profit, poor accounting practice, cash flow inadequacies, lack of viable investment opportunities, and low or no source of income. (2) Physical resources like the company location, abysmal culture, old equipment, and technology issues. (3) Human resources like managerial inadequacy, poor staffing, poor morale and customer dissatisfaction.
Other factors depend on business leaders’ decisions.
Example of this includes no management structure, no differentiation of ownership and management, no succession plan, unprofitable business model, lack of uniqueness, poor knowledge of the operating sector and its value chain, value dysfunctional, even rapid growth and over-expansion was cited, and not in touch with customer needs, etc.
These factors can easily be forecasted with some level of reliability, and therefore, a company has a good chance of reducing this form of business risk.
The company leadership usually have control over internal factors, what is required is just adequate managerial skills and continuous education to set things right.
However, findings indicated that this important feature is usually missing in the SME operators and business leaders.
The external or non-controllable causes of small business failure as perceived by a sample of small business owners and managers surveyed are as follows: government policies, natural factors infrastructure failures and deficits, stiff competition, rising costs of doing business, social, legal and political changes, even common macroeconomic factors such as business cycles, recessions, insecurity, government debt, inflation, high taxation, exchange rates, high-interest rates, excessive regulations, and/or a lack of interest from the public in the business’s offerings 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 prevalent business failure in Nigeria.
Because a depressing economy will impact negatively on firm’s sales, which in turn negatively affect firm’s business continuity.
It is imperative to state that these macroeconomic factors and external causes cannot be controlled or forecasted by entrepreneurs and SME operators.
Consequently, it poses a big risk to businesses unless government intervene decisively and give the needed policy responses. This is the big prayer of all SMEs and entrepreneurs in the country.
The warning signs of failure of SMEs are either one or the multiplicity of internal and external factors mentioned above.
SMEs can also fail if the business lack a contingency plan to react and mitigate any of the challenges in the event of any crisis.
The best way to manage and mitigate business failure due to these factors is to maintain an adequate level of capital.
A company with adequate financial resources can more effectively weather some level of business risk. Even at that, it is important to state that the prevalence of business failure is a vital indicator of the state of economy in any country.
Conclusively, despite the high rate of business failure much is still desired, if 80 percent of new businesses fail, according to Bloomberg, then 20 percent of new businesses can succeed and this percentage can also scale up. But how? Whether you desire to start a new business or you are already running a business, you must understand that success depends on careful strategic planning and sound fiscal management.
SME operators need to critically identify the actual business growth drivers and leverage strongly on them for sustainable business study.
With the COVID-19 pandemic forcing most SME operators to work remotely or even stay at home, this new normal could affect service quality and also cause severe business disruption.
Therefore, entrepreneurs need to understand the current competitive marketspace, customers’ needs and their current buying habits.
For SME operators to stem the tide of the current realities, effective communication with employees and customers is necessary to thrive, this can be achieved with effective use of technology and mobile telephony.
Furthermore, strategy to mitigate the predictors of business failure along with adequate business process review needs to be in place to cope with the operational stress generated by COVID-19.
Additionally, it is key to leverage on technological innovation and adopt a workable risk management strategy. When this strategy is in place, companies can anticipate the risks and respond appropriately to guarantee business sustainability. Good luck!
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Dr. Timi Olubiyi holds a Ph.D. in Entrepreneurship and Small Business Management. He is a prolific investment coach, Chartered Member of the Chartered Institute for Securities & Investment (CISI) and a financial literacy specialist. He can be reached on the twitter handle @drtimiolubiyi and via email: [email protected],for any questions, reactions, and comments.