Why small businesses are vulnerable to Covid woes

Small and medium-sized enterprises (SMEs) are struggling for survival during this Covid-19 period due to tough economic times.

A lack of financial muscle, low sales, high cost of doing businesses and unreliable value chains have compounded their already dire situation.

In March last year, the government enforced one of the stringent lockdown measures, which included a ban on local and international flights, in-and-out movement restrictions in five counties of Mombasa, Kilifi, Kwale, Nairobi and Wajir as well as dusk-to-dawn curfews (7pm to 5am) to contain the spread of the coronavirus.

The measures saw thousands of businesses close shop, rendering hundreds of thousands jobless.

According to the Kenya National Bureau of Statistics (KNBS) data, the number of people in employment fell to 15.87 million between April and the end of June last year compared to 17.59 million the previous quarter.

This came on the back of a Central Bank of Kenya (CBK) warning that about 75 per cent of Kenya’s SMEs could collapse if they fail to get fresh funds from banks or equity partners by the end of June.

The Central Bank projection is backed by the latest World Bank Group Socioeconomic Impacts of Covid-19 on Kenyan firms study that shows only 50 per cent of small firms (5–19 employees) and medium-sized businesses (20–99 employees) are still operating.

Notably, eight in 10 (80 per cent) of large firms (100 plus employees) are in businesses.

“Large firms are able to cover running costs for longer periods than smaller firms,” says a World Bank survey report.

“Micro-sized firms (0–4 employees) are more often forced to permanently close or temporarily cease operations by their own choice, indicating that they are less able to deal with the aftermath of the pandemic on their own,” the report argues.

The survey, conducted between June and August last year through phone interviews, sampled 2,070 firms randomly selected from the universe of 138,186 enterprises available in the 2017 Census of Establishments from the KNBS.

Amid customers’ low purchasing powers due to retrenchments and wage cuts, those that are still in business are grappling with staying afloat amid low sales.

While sales for small firms declined by 90 per cent, big companies recorded a meagre 10 per cent.

“For the 90th percentile of large, agricultural firms in Nairobi, the sales remained the same,” the report notes.

Only 26 per cent of workers in large firms are employed in vulnerable firms with 48 per cent of workers in small firms.

“More than 50 per cent of jobs are vulnerable in the tourism sector, compared to eight per cent in manufacturing firms,” the report reads.

“Firms in the tourism sector, which consists of accommodation and food services, have experienced the largest decreases in sales and are not often fully operating.

“In the median firms in the tourism sector, sales have fallen by 70 per cent.”

Although two-thirds of all businesses are still open, 20 per cent of workers are in businesses that are temporarily closed with 16 per cent (partially opened).

“Especially workers in small and medium-sized firms in tourism and other services sectors, as well as in older and non-exporting firms, are facing high vulnerability. More than 50 per cent of the jobs in the tourism sector and 45 per cent of jobs in other service sectors are vulnerable,” the report shows.

Nonetheless, firms in the agriculture, information and communication, financial, and real estate and social services sectors saw little disruption in sales.

The report adds that the reduction in cash flow has had a large impact on the sales of firms in manufacturing.

“Lower demand is more severely affecting sales of businesses in retail,” it adds.

Women were disproportionately affected by the disruption, according to the report.

“Over 40 per cent of businesses with a largely female workforce are temporarily closed, leaving women more vulnerable than men.

“However, firms with more female employees less often lay off workers and more often grant leaves of absence,” it shows.

Kenyan enterprises project sales to decrease by 27 per cent in the first six months of 2021 in comparison to the previous year.

“Firms anticipate employment to decrease at a slightly lower rate than sales.

“Large firms and firms in agriculture or manufacturing are more optimistic about the first six months of 2021,” it adds.

Moreover, it also shows that almost half of firms with five or more employees are embracing digital platforms.

“Larger firms more often use digital platforms in other ways, for instance, for supply chain management, payment methods, or sales. Also, younger firms are more versatile in their use of digital tools.

“Firms in food services could potentially take more advantage of service delivery options,” it adds.

Only 20 per cent of firms, which have received public support, are aware of such assistance with the rest not being in the dark.

“Eighty per cent of firms report not having received assistance because they were not aware of any government measures. Of the firms that received any assistance, 40 per cent received cash transfers and 33 per cent received tax deferrals,” shows the report.

Demand for assistance among companies varies.

Often, micro-sized companies will call for deferral of rent, mortgage, and utilities whereas larger firms prefer fiscal exemptions or deferral of loan payments.

“Similarly, firms hit by a decrease in demand are around 24 percentage points more likely to call for cash transfers, while firms that report a decrease in hours worked are more likely to report tax deferrals as the most needed policy response.”

The report recommends policy responses to be divided into four areas such as access to finance, firm capabilities, access to new markets, and reducing uncertainty.