Helping SMEs deal with growth, operational challenges and reduce failure rate

The Micro and Small Enterprises Act 2012 defines micro enterprises as a firm, trade, service, industry or a business activity whose annual turnover does not exceed Sh 500,000 and whose total employees are less than 10 people.

Unrealistic and restrictive as it is, and where as a good chunk of Small and Medium Enterprises are left outside the scope of this act, it is the only direct legal infrastructure targeted at SME support that I have come across.

According to Kenya Agribusiness and Agroindustry Alliance, Small and Medium enterprises popularly known as SMEs account for 95 percent of firms in most countries.

SMEs create jobs, contribute to GDP, aid industrial development, satisfy local demand for services, innovate, and support large firms with inputs and services.

A 2017 Exploratory Study of Critical Success Factors for SMEs in Kenya conducted by Jacqueline Douglas et al., found that a whopping 70 percent of SMEs fail within the first 3 years. This translates to about 23.3 percent per year attrition of the initial investment. In a pandemic environment, this attrition rate has invariably gone up and this is disastrous for wealth and employment creation.

With the above statistics, it is obvious that SMEs play a fundamental role in the development and growth of the economy. However, the high attrition rate is a big cause of concern, and is indicative of the harsh economic and operating environment SMEs face in their struggle to survive.

Last week I looked at some policy initiatives the government can pursue to alleviate the pain of SMEs. In this article, I am going to look inwards with a review of internal growth and operational challenges SMEs face. I will also look at how SMEs can best address these challenges to be able to operate to their optimum level and therefore mitigate the risk of failure.

The Internal challenges apply to all SMEs generally and are reflective of internal dynamics that if left unaddressed, may work to derail the very survival and growth agenda of an SME. An SME facing all the five internal challenges has a very small chance of survival, even when all external threats are eliminated.

Therefore, an SME must take the earliest initiative to minimize or eliminate these internal weaknesses.

Managerial Competence

Top on the list is a lack of trained and competent managerial resource. SMEs play a very important role of enhancing development and economic integration. In our devolved governance structure that is still taking root, SMEs play the all-important role of promoting local industries to narrow the disparity between counties or regions. However, SMEs lack a trained pool of managerial resource to guide development of competitive, local based, industrial and commercial powerhouse.

The majority of SME owners manage the enterprises themselves, with few possessing the critical skills to develop business strategies, forecasts and plans.

The lack of managerial and technical expertise seriously inhibits innovative start-ups and business diversification. There is zero to very little investment in Research and development further frustrating the speed of innovation and product improvement.

This management resource handicap can be greatly mitigated if, entrepreneurs, together with their key management staff, embraced enrolling in a mentorship program. Matching SME owners with suitable mentors is possible strategy to support SMEs in a very cost effective way.

Under the mentorship program, relatively more educated and successful mentors will guide mentees by sharing their real-life business tips and knowledge.

SME associations, without involvement of the government, can very easily achieve this intervention. SMEs can also develop by learning from and sharing information among themselves through business networking at a relatively low cost. Again, trade associations like Kenya Agribusiness and Agroindustry Alliance can easily make this a reality and improve performance of this sector immensely.

Finances

Finance or lack thereof is the second most cited obstacle facing SMEs to grow their businesses in emerging and developing markets. SMEs are less likely to obtain bank loans than large companies do.

Largely SME’s lack collateral for loans and the lack of knowledge to keep proper records and write business plans influences this state of affairs. Instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. Published research has found that about half of formal SMEs do not have access to formal credit.

The financing gap is even larger when micro and informal enterprises are taken into account. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need.

Against this backdrop, the emergence of alternative, technology-enabled means of financing is key to unlocking SME funding deficit. The World Economic Forum’s Global Agenda Council on the Future of Financing & Capital aims to foster the flow of financing to the real economy, with a particular focus on finance for SMEs.

This will involve, among other things, innovations in Supply-chain financing and government procurement; Use of technology to reduce risks, enhance efficiency leading to lower costs; Securitization and other means of obtaining capital relief for traditional sources of finance; Introducing non-traditional sources of long-term capital and Capacity building for both financiers and SMEs.

Technical Skills

The other hindrance is a lack of trained industrial human resource base. There is a huge shortage of industrial human resource, especially technicians, working for SMEs. This has become more acute in the last decade when every other middle level technical college was converted in to a University and other tertiary institution.

It is encouraging to note, however, that there has been a lot of emphasis of TVT training institutions being resourced to train the bulk of technical work force to take up roles as artisans and craftsmen in the SME sector.

Poor Resource Management

Poor Resource Management is undeniably a significant contributor to sustained poor performance and hence failure of SMEs. Pass by any market for fresh produce and you will notice a pile of rotting fruits, vegetables and all manner of agricultural produce. SMEs in manufacturing are not spared either, as the amount of waste they produce is significantly high with little recycling or by-product application.

Innovation and adoption of technology in manufacturing and service will go a long way in promoting efficient resource utilization, reduce costs and ensure profitability and survival for SMEs.

Lack of Market Information

SMEs generally have less ability to gather information and must rely on specific traders to obtain market information. As a result, even though SMEs may have a comparative advantage in terms of raw materials or labor force, they are unable to exploit these advantages by proposing products that meet market needs.

In many cases, SMEs may not be able to secure new distribution channels to expand their businesses. The SME Support Centre (SSC) is a timely intervention with a promise to bridge the information gap exhibited by SMEs.

Born out of the need to tackle the African unemployment problem through providing business and investment support to SMEs, SSC provides the necessary business advisory and mobilizing the investment capital required to support the growth of these companies, provide capital and other technical assistance to SMEs.