Business Failure of SME’s; How to overcome

A Small business that is independently owned and operated and not dominant in its operations are faced with many challenges. Such challenges may or not be within the control of the entrepreneur.

In this article we shall highlight the major challenges faced by small firms and later on how to overcome and succeed.

Major challenges faced by SME’s are:

Financial limitations

As a result of their size, small enterprises have limited tangible and intangible resources to meet their financial needs. This problem is worsened by under-capitalization due to poor planning, lack of initial start-up capital, poor management reflected in capital tied up in stock, poor profit margins and cash flows, delays in the release of debt financing and poor security.

These financial limitations seriously hamper small enterprises trying to handle big orders, trying to provide for working capital, invest in product and process development or improving technology.

Weaknesses in managerial functions

Usually in small enterprises, one person performs entrepreneurial and managerial functions. The owner manager makes strategic and tactical decisions and also takes care of functional area that is, marketing, production, finance, personnel etc. Weaknesses in these areas may be traced to a number of factors;

The entrepreneur may have started out with just one skill but he may not have experience in business management

The smallness of operations does not justify an in-house team of specialists

The enterprise has fewer financial resources and poor networking capabilities for example, it is believed that Asian businesses succeed because of their fantastic network.

Inaccessibility to markets

Small enterprises generally serve markets that are in the immediate vicinity which offer only limited opportunity for expansion. This tendency may persist as a result of;

• Imitative patterns of development so that markets become saturated
• Limited marketing management capabilities and marketing resources
• Lack of technical base and know-how which confines small enterprises within a narrow range of products and services
• Lack of exposure to information on new products and markets opportunities and lack of resources
• Lack of resources to undertake product and market development 

Limited knowledge of Production and Technology

Small enterprises generally rely on the technical knowledge of the entrepreneur or the partner. Workers usually acquire skills on the job and they don’t have money to hire highly qualified workers. The following worsens this situation;

• Lack of access to technical training and upgrading
• Lack of access to technological information and sources of technical assistance.
• Lack of resources to invest in improved appropriate technology

Inaccessibility to Information

Lack of information is one of the causes of problems and difficulties mentioned above.

It’s also a major constraint with regard not only to markets, finance, technology and sources of other inputs but also to changes in the business environment and administrative procedures, which are essential to the business survival. Access to information is blocked by the following factors;

• The entrepreneurs limited education
• His restricted circle of conducts and networks. He relies mainly on his immediate business contacts i.e. family. Relatives, his suppliers, customers and salesperson
• His lack of financial resources to buy information.

Unsupportive Policies and Regulations

While small enterprises are flexible, they can be particularly vulnerable to unsupportive policies and regulations because they don’t have resources and reserves to fall on.

They also don’t have the managerial and technical capacity to deal with variable and economic and business policies, for example fluctuating fiscal and monetary regulations, complex licensing and authorization procedures.

In Kenya, the situation has been worsened by the ambiguous legislation, corruption, inefficiencies and generally policies that are biased against small enterprises

Possible Interventions

The small enterprise sector has a vital and important role in promoting social and economic well being of developing countries such as those found in Africa.

Over 50% of all new businesses fail during their first three years of existence. In spite of these facts, self-employment continues to rank high as a career choice. Some of the possible interventions that will alleviate the above problems include the following;-

Comprehensive Management Development

Training and consultancy in one package-Training may be offered on a specific functional area, for example, financial management followed by consultancy services.

The cycle may be repeated addressing different management needs such as strategic planning, quality control, maintenance and management. The best way is to make the packages flexible and participatory as is done by firms such as Viffa Consult Limited

Finance and Credit Facilities

Entrepreneurs need to build up their management capabilities thereby making access to funds easier. With the required knowledge and skills, they will be able to organize their businesses and access funds easily.

The other possible strategy would be to sensitize bankers to be more accommodative and sensitive to the requirements of small enterprises.

In addition there are various government initiative such as in Kenya there is Uwezo Fund, AGPO that goes to foster SME’S

Developing Markets and Marketing Opportunities

Opening up new markets and expanding the present ones is an intervention that can be achieved by identifying market opportunities and linking individuals.

There are many forums organized by government and private companies that SME’S can take advantage of to network such as trade fairs and exhibitions.

Promoting sub-contracting between large and small enterprises would also serve as openings to the small business.

Small businesses can also improve their product quality and pricing strategy to be able to open up new segments.

Technology Upgrading

The objective is productivity improvement. Expansion and diversification involves processing, improvement and the use of better production methods. Technology related services provided by Viffa Consult Limited  to improve productivity include the following:-

• Training and capability building in the management of technology
• Exposure to new technology options through the provision of information and direct contacts.
• Promoting technology linkage from large to small enterprises through linkage programmes
• Patron programmes where  Viffa does  the actual teaching. This involves training in quality improvement, process control, maintenance management and specific financial support for upgrading equipment, equipment acquisition and process improvement.

Promotion of Inter-firm Cooperation and Networking

Inter-firm cooperation and networking among small enterprises is a powerful mechanism for helping them overcome their constraints and problems due to their smallness by accessing the necessary information.

Inter-firm cooperation involves;

• Joint marketing activities such as marketing research, joint promotion etc. Most of them lack information regarding market.
• Capacity and specialized sub-contracting among small enterprises.
• Production sharing incase of big orders.
• Group-based credit schemes with financial institutions
• Sponsoring common services such as bookkeeping and quality testing. Upgrading management and taking technical training skills through joint inter-firm comparison programmes and group action lining and business training.

Integrated Sector Specific Approaches

This is an integrated and comprehensive package of assistance that focuses on specific group of enterprises in an identified sector. It is aimed at solving policy related issues.

Such a sectoral approach can be very effective in building up interrelated enterprises.

This is a long-term approach and can involve any of the following;

• Sectoral target groups are defined and the enterprises are encouraged to organize into groups and associations, for example, Jua kali associations
• Environmental, managerial and other problems are diagnosed and major constraints identified.
• Sector specific strengthening strategies and services are developed which involve all the above interventions
• Policy constraints are addressed by Government authorities with the support of enterprises information

The small enterprise sector has a vital and important role in promoting social and economic well being in Africa.  An important aspect of economic growth in any country is the key individuals that promotes change and initiate development activities. Job creations depend in a large part, upon the births and expansions of small enterprises. Entrepreneurs have the ability to spark new ideas and develop new products and services that create new enterprises, which in turn creates the need for additional manpower.