Why SMEs fail and its impact on national development

Strategy

Why SMEs fail and its impact on national development

The role of Small and Medium Enterprises (SMEs) in creating and sustaining national development in relation to job creation has been considered a key tool in modern-day poverty alleviation, economic emancipation and total well-being. SMEs are generally referred to as the engine room of a country’s economy; this is because they engender the usage of local raw materials, create jobs, promote firms’ intermediate interaction for gross domestic product (GDP) growth, and require little or no formal education for their day-to-day operations.

The relevance of SMEs cuts across localisation of products to innovation, therefore, giving SMEs leverage to contribute immensely to the development of their host community through engaging unemployed individuals. Government has enacted laws and policies to support SMEs development by focusing on how to integrate and scale indigenous capacity for inclusive growth. A large number of SMEs fail to achieve maturity, and a number of them eventually die, with estimates ratio given at five in ten per year.  The reason(s) for these SMEs failures and death are unknown to business managers, but evidence reveals that five to ten die within the first twelve months of their existence, and only about two exist beyond ten years.  These failures and eventual collapse are known to be caused by internal and external factors among which are poor management skills, lack of finance, poor preparation, poor knowledge of the sector and its value chain, etc. Others include poor accounting and book-keeping, lack of production manuals, minimal or no quality control, and raw materials sourcing which are responsibilities of the owner.

Another often neglected cause of SME failures is staff challenges. It is impossible for the owner to do everything, there is a need to engage the services of employees, but rather than aid progress, they become cogs in the wheel of progress, and without a substantial input from the business owners, what started as a viable business may fail within weeks or months. Another factor is that most start-ups lack the underlying training to engage what they do. Most people start SMEs because they have unlimited cash flow and feel like starting a business. Challenges arise in the course of running the business, and lack of required training makes the business derail.  New business entrants underestimate the importance of training and/or experience before venturing into business. For instance, people venture into agribusiness because of the potential profit they want to accumulate without paying attention to the associated challenges involved in the process. Hence, the likelihood that the business will fail or die becomes higher when technical difficulties arise.

The use of mobile phones can be said to be transformative, and aids in expanding financial access to the rural population but much is still needed to be done. Information is of utmost importance to every successful business. But the lack of useful and adequate information has led to the collapse of many start-ups across the world. The low rate of internet penetration and usage in developing economies such as Nigeria poses a more significant threat to start-ups. Relevant information regarding businesses is not readily available or accessible. The volatility of the business environment poses a risk for business growth; documentation of the business environment would have helped new entrants in determining important operational factors. For competitive advantage, prices, nearness of raw materials, and competitors, SWOT are considered before venturing into business. The lack or unavailability of information requires that new entrants dig deeper into the factors that necessitate consumers’ choice of a product and service. These will equip them with areas of concentration pertaining to customers’ demands.

Although, due to the small capital required for SMEs business engagement, most entrants do not conduct the necessary feasibility studies, hence, failing before starting the business. SMEs accounts for about 99% of all business in Europe, and about 90% in Nigeria. This implies that for every failed SME, there is a significant loss of capital and employment. The increase in the unemployment rate in the country is as a result of failed SMEs; therefore, it is expedient that entrant and existing SME managers focus on developing skills and gathering information needed in a volatile business environment. This will, in turn, aid unemployment reduction in the country, and engender growth required for national development.

 

What other sustainable solutions can you recommend in ensuring SMEs in Nigeria survive the long-term?

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