Cash flow crisis hinders growth of SMEs in Kenya

Majority of small firms in Kenya rely on bank loans for capital financing, putting their growth expansion at the mercy of lenders and fluctuating interest rates, a new study has shown.

An analysis of firms that entered this year’s Top 100 mid-sized companies’ survey shows that the number of SMEs that turned to lenders for credit lines and overdrafts increased to 67 per cent compared to 57 per cent in 2012.

The findings were released Thursday ahead of the unveiling of Kenya’s top SME Friday evening in the annual entrepreneurs’ competition.

As a result of the high cost of credit, most entrepreneurs have cash flow challenges, hence resorting to digging deeper into their personal savings; with others turning to friends and family to raise funds for day to day operations.

“About half of the businesses face working capital and funding challenges mainly arising from delays in payments from customers,” said Sheel Gill, head of transactions and restructuring at KPMG East Africa.

“Most entrepreneurs rely on bank loans as a source of capital for expansion and operations; as well as borrowings from friends and family.”

The ratio of SMEs reporting challenges with working capital increased by three per cent to 49 per cent; blamed on extended debtor days and funds being tied up in fixed assets.

This provides an opportunity for venture capitalists, private equity firms and angel investors to extend financing to smallholder businesses in Kenya.

Top 100 Mid-sized Companies is an annual survey launched in Kenya in 2008, Uganda in 2009 and Tanzania in 2010 by auditing firm KPMG East Africa and Nation Media Group.

The study seeks to identify Kenya’s fastest growing mid-sized companies in order to showcase business excellence and highlight some of the country’s most successful entrepreneurship stories.

It is also backed by Sage Pastel, Nairobi Securities Exchange, Strathmore Business School and UAP Life.

(READ: UAP backs Top 100 survey with sponsorship deal)

About three in ten or 28 per cent of firms surveyed this year said they are considering listing on the Nairobi bourse; which now has a special segment dubbed Growth Enterprise Market Segment (GEMS) for SMEs.

Of these, 49 per cent of the firms mostly in manufacturing, ICT, transport and construction industries plan to list at the bourse within the next two to three years.

The cash-related constraints have hampered expansion of SMEs, forcing most of them to operate single branches. “Majority of the companies have no additional branches other than the main office,” the 2013 survey says.

Only half of the respondents said they plan to expand and enter regional markets within the next one year, compared to 61 per cent last year.

Most Kenyan entrepreneurs are eyeing business deals in Uganda and Rwanda due to their favourable investment climate. To participate in the annual rankings, a firm needs to have an annual turnover of between Sh70 million and Sh1 billion.

Almost half of the companies that participated in the 2013 study had an annual turnover of between Sh70 million and 499 million. About three quarters of the companies are fully Kenyan owned; and two-thirds of them were set up more than a decade ago.

Most of the participating enterprises were in real estate, leisure, manufacturing, transport and travel, energy, and ICT sectors.

The number of small firms taking to technology tools such as internet connection, ERP solutions, customer feedback as well as digital accounting and filing applications grew to 75 per cent this year.

99 per cent of businesses indicated that the impact of the accounting software applications on the business was positive.

Last year, Atlas Builders and Plumbers, an engineering firm on Nairobi’s lower Kirinyaga Road, was crowned the winner of the 2012 edition of the annual Top 100 survey.

The company’s director, Dr Harish Bhanderi, said beating more than 200 participants came as a major surprise; as it was the firm’s first entry in the competition.