Reasons Micro, Small, and Medium Enterprises (MSMEs) Fail
The business sector in Nigeria has seen lots of lots of changes over the last couple of years. The market has seen a much significant rise in the number of Micro, Small, and Medium enterprises (MSMEs). This is partly due to the fact that they are not so complicated to startup and run. The fact that it does not have to be capital intensive makes it an even more viable option for many of the entrepreneurs and Merchants across the country.
One thing to note, however, is the undeniable fact that as much as there is a huge influx of MSMEs in the Nigerian commercial industry today, a high percentage of them also pack up within few months of running. Actually, the rate of businesses that shut down after a brief period is so alarming, but isn’t so noticeable since there are immediate replacements for the ones who leave.
Many entrepreneurs or merchants who notice this trend might be discouraged by the fact that the ratio of MSMEs that stay above water to the ones that go under is so low. This is scary enough to deter anyone to venture and establish any MSMEs within the Nigerian market. Regardless of that fact, however, we have also seen many examples of businesses that have thrived and many have even expanded.
In order not to fall victim of these calamitous event of folding up within a few months of running a business, we are going to examine the different and major reasons why MSMEs fail. This will be an eye opener for potential investors in the Nigerian market looking to set up their business here on the home soil.
There’s a popular saying that goes: “If you fail to plan, then you plan to fail”. This principle is multidimensional as it cuts across all sectors that affect human life, relationship-wise, health-wise, business-wise, and so on. MSMEs also are not left out. A lot of businesses are launched with probably a great idea for a specific product or service which as obviously thought, would yield massive profits, but eventually crash as a result of the inadequate or lack of a solid business plan to back it up.
Let’s not fail to note that there are MSMEs that also execute their ideas with a business plan but still end up with the same fate with businesses that lacked one in the first place. This can be as a result of many factors like unrealistic projections, inaccurate info, poor data translation, and so on.
To have an effective business place, it must incorporate the following:
- Mission and strategy
- Development financing
- Financial objectives
- Sales and marketing strategies
- Competitor analysis including pricing
- Market summary
- Resource plan
- Financial forecasts (income statement, balance sheet, cash flow forecast, capital requirements, working capital)
Business plans are so important to the survival and growth of any business, as they become the backbone your project depends on. Additionally, it is key to note that without a good business plan, most financial institutions hesitate to give out loans which will help grow your business at any point. This brings validation to how key a business plan is to any business venture.
Lack of working capital
This doesn’t really need any much explanation, as pretty much anyone knows nothing works without the capital to fund the business while it’s running. Most businesses find themselves in such a situation due to unrealistic expectations in terms of revenues and fund generation on the side of business owners. This can also result from a loose business plan which only focuses on the set up cost without reverence to running costs of the business. This leads to the untimely death of any such business.
To be better prepared in this aspect, entrepreneurs and business owners need to keep it in mind that most MSMEs take a lot of time, up to two years to be established and run on self generated income. During this period, business owners have to keep the business running by finding the business needs like paying staff, maintenance, and so on. Having a pessimistic approach towards your business in its early life will help you avoid this mistake and improve your chances of successfully setting up a great MSME.
Excessive Customer Incentives
Sue to the presence of huge competition in any business market today, many business want to have more customers to edge off their competitors. They do this by offering massive deals, promos, and added incentives to customers who do business with them. Some go as far as offering products on credit to customers. While it is a huge plus for your business to have big clients in the market, providing customers with incentives that are over the top can prove critical for your business, and could spell the end of it.
Before committing to any credit terms with new customers review your cash flow, and build a model which factors in late payment. If the results mean negative cash flow, you may need to go back to customer and try to negotiate more favorable terms or some form of upfront payment. If the customer is not open to negotiation, then you may need to think twice about going ahead. After all, winning business with negative cash flow implications is not good business.
Failure to outsource correctly
Outsourcing can be one of the most important parts of running an MSME, and it could be the end of it as well. When a business is still in its early stages, it might prove difficult to avoid outsourcing, that is, obtaining goods and services by contract from an outside supplier. Businesses still in their early stages usually have specific functions and tasks that needs to be outsourced, and usually is to the benefit of your business.
However, there are some disadvantages that are associated with outsourcing which can be avoided by having these important ways in mind:
- Cheap should not always be considered
- Keep the outsourcing relationship close
- Identify the core areas that need to be outsourced and where you lack expertise
- Know the right cost of what you need
- Regular communication is vital
Rarely will you have a market where competition does not exist. It is an integral part of day to day running of business. The only way competition might be absent is only if your business sells a new product that never had a market. Without proper understanding of what your competition does through their products pricing, strategies; your business may find itself in a huge mess. To think that the success of your business also depends on your competition usually sounds ridiculous to many, but it is the truth.
In order to tackle competition issues properly, you need to do a detailed analysis of your competitors. This has to include the products and services they offer, their pricing, strategies and so on. Even after having a great analysis of your competitors through your business plan, it has to be updated over time in order to keep it relevant.
Poor/Lack of Finance Tracking
This is an easy trap to fall into by business owners, as more energy and focus is invested in developing and selling products/services but err in tracking their income and expenditures. To most, accounting is like a huge bulk of work, but in real sense should be the basis for effectively running a MSME.
Advancing technology has given many business the easy way to track finances through many applications and software solutions specifically designed to help in this vein. It is also possible to outsource your MSME accounting needs by employing a local accountant that is cost effective to help in this side of the business.
It is possible that your MSME product offering is one of the best across Nigeria and beyond. However, if your target customers have no idea of your business, or where to reach you, the chances of success of your MSME just got slimmer. Marketing and advertising is one of the easiest concepts in our technological world today. What’s more? It is cost effective to run. So why not take the chance to set up a great marketing strategy when the consequence of not doing so is so damaging that it might kill the growth of your business.
The advent of online marketing, social media and the now well established routes of email and websites mean that you can place and promote your product where your customers are.
Poor management and leadership
One thing is to have a powerful idea, another is to have the management and leadership skills to properly execute the idea. Poor management of an MSME results in reduced productivity, lack of focus on the important aspects of your business, poor morale, poor business outlook, and so on. While lots of people, especially entrepreneurs, have inborn leadership skills, it is also something you can learn.
Today, there are lots of books, materials, and guides to become the great, insightful leader that your MSME needs to reach the next level. Additionally, you can also employ the services of a well established business mentor who will guide you through the concepts of leadership that will help move your business forward. Identifying your weakness early on and setting up a means to fix them will surely lead you to have a higher chance of success.