Three ways SMEs can succeed despite current biting credit shortage

After a dramatic 2017, most entrepreneurs are now looking into 2018 with lots of hope and optimism.

There is a general feeling of renaissance and positive energy to restructure business operations to get back to desired growth trajectories for most small and medium enterprises (SMEs).

At the foundation of this renewed hope is the need for a radical assessment of long-term business strategies; and aligning them with short-term business goals, to maximise output and achieve optimum business performance.

This, however, is not a common practice for more than 75 per cent of SMEs in Kenya; going by our experience at Fie-Consult while supporting a growing number of SMEs across the country in strategy development and operations re-engineering.

With the above lack of structured strategic and operational planning all small businesses in Kenya will need to proactively consider the following three defining themes for their business success in 2018.

1.Strategic risk mitigation planning

Last year saw most SMEs suffer from the prolonged electioneering season that took an additional three months before semblance of normalcy was restored.

Despite the fact that the polls were to a large extent peaceful; the political risk hinged on most SMEs throughout 2017, premised on the ‘wait- and- see’ perception by clients, suppliers, financiers and other strategic business partners. Revenues took a dive while others reported lower growth rates than expected.

Going forward, SMEs need to factor in these kinds of risks into their annual and medium term plans to avoid being caught unprepared and then ending up with cash flow problems.

At the bear minimum, each should create a “Dooms Day Fund”. This is cash savings (equivalent to at least three months operational expenditure for your business) that remain untouched and are only utilised when the business is exposed to risks of higher magnitude than it was prepared for through other standard risk mitigation mechanisms.

2.Alternative sources of funding

Banks are becoming unreliable sources of funding despite the fact that most of the commercial banks have active SME functions. The capping of the interest rates coupled with the high risk profile for most SMEs saw banks shift their focus to corporate and government lending in 2017.

This resulted to a pseudo crowding out effect for the SMEs; as afar as borrowing from commercial banks is concerned.

As a matter of urgency, SMEs need to start scouting for alternative sources of funding to meet their working capital and capital expenditure needs. MFIs and saccos are the low lying fruits; though their interest rates tend to be higher; always in the north of 30 per cent per annum in most cases.

READ: SMEs shun banks, turn to family for start-up cash

However, entrepreneurs running micro-enterprises borrow heavily through M-Shwari at an annualised rate of about 90 per cent. This confirms that access to capital is more important than the cost of capital within our local entrepreneurship ecosystem.

And therefore points to a conclusion that other sources of capital will be ideal for SMEs in 2018; even when their cost of capital is higher than the commercial banks interest rates.

3.Effective working capital management

More than 50 per cent of SMEs we encountered in 2017 had working capital challenges. Their cash flow challenges were mostly linked to and magnified by the slow-down in business due to the political fever throughout the year. However, the underlying bug for most was lack of proper working capital management strategies.

Negotiating for longer payable days with your suppliers and shorter receivable days with your customers is a foundational principle in working capital management that you need to practically implement as far as your business model allows.

Leasing instead of buying assets will save your business from having to make huge cash payments that will threaten your liquidity.

In addition, maintaining a savings account, which carries a liquidity buffer for your business is another way to ensure you are able to meet your short-term financial obligations; in an environment where chances of accessing short-term loans from commercial banks are shrinking.

JEREMY RIRO is a strategy consultant & financial analyst.