Harnessing The Power Of SMEs In Africa

Most of us hear the term SME being used quite a bit in various circles such as government officials, financial institutions among others but we have never really understand what it means and the potential it has especially in Africa. Well for starters SME simply denotes Small and Medium Enterprise.

Many entrepreneurs or start ups in Africa may not be too sure if they fall in this category or any other category. Most entrepreneurs assume that if your venture is not listed in the stock exchange then they automatically fall into the informal sector where corporate governance and accountability issues are thrown to the back burner.

Research has shown that SME’s in Africa account for higher employment and contribution to the economic gross domestic product than large firms.

Most African governments have still not figured out how to harness the potential of SME’s through creation of enabling environment.

In this article we are going to learn what exactly are SME’s and how do they grow and if not at what stage go they die off and finally how can they be assisted to thrive.

The definition of SMEs is subjective and varies among individual countries and industrial groups from one institution to another.  In other words there is no definite definition of SMEs but some criteria have been used by different institutions to define such businesses.

The major criteria used to define SMEs include:-

• The number of employees – 1-49 employees
• Sales value or volume-  low
• Financial strength-  weak
• Relative size  – small
• Initial capital  – small
• Independent ownership- one or a small number of persons

Some of the Characteristics of SMEs

• Capital of the business is supplied by one or a small number of persons.
• Management is generally independent, reporting to oneself but not to a board of directors.
• The area of operation is local and the market for the business is also local.
• The owner manager-supervisor supervises all the operations of the business.  The owner may delegate authority and some of the functions to his employees.
• SMEs are normally based on simple technology with low import content both in capital structure and raw materials and therefore they are said to have greater intersectoral linkages.
• Normally the level of education of the owner-manager is often low and this does not make for effective management.
• Most of SMEs are labour-intensive because they tend to use human capital per unt of production than large enterprises.
• Typical SMEs therefore combine their vision to the local markets and thus ignore wider and distant markets; hence the quality of goods is low.

Growth Models

The growth of SMEs is a major driver of the economy.  This is because they contribute to employment growth at a higher rate than large firms.

Stage 1- Existence

In this stage, the main problems of the enterprise are obtaining customers and delivering the products on services contracted for.

Among the key questions that an entrepreneur needs to ask are:- Can the enterprise get enough customers? Deliver the products and provide services well enough to become a business? Can the enterprise expand from one key customer or pilot production process to a much broader sales base? Does the enterprise have enough money to cover the considerable cash demands of this start-up stage?.

At this stage, the organization is a simple one where the owner-manager services everything directly.  However, the main challenge in that the enterprise has yet to establish either production or product quality.

Another challenge is that the owner-manager typically dominates the decision-making process.  There is no dominant strategy, less formal structures, lose control system etc.

Viffa Consult has observed that many enterprise at this growth stage rarely develop a business plan or a business model that can act as a blue print see article (http://viffaconsult.co.ke/writing-a-winning-business-plan/)

Stage II Survival

At this stage the business has demonstrated that it is a workable business entity.  It has enough customers and satisfies them sufficiently with its products or services to keep them.  The main issues at this stage are: In the short run, can the owner generate enough cash flow to break even and to cover the repair or replacement of his capital assets as they wear out?

Can the business generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given the industry and the market niche, to earn economic return on assets and labor?

At this stage the organization is still simple; the enterprise may have a limited number of employees.   Systems development is still synonymous with the enterprise.  The enterprise may grow in a size and profitability and move on to stage 111.  It may, as many enterprises do remain at the survival stage for some time earning marginal returns on investment and eventually go out of business when the owner gives up or retires.

It is mostly at this stage that many SME fail or go out of business. It is therefore critical that the enterprise re-evaluate its business model and strategic plan to ensure that it is in concert with reality. Getting expert advice from industry experts or outsourcing non core functions can be a possibility (http://viffaconsult.co.ke/outsourcing/)

Stage 111 Success

The decision facing entrepreneurs at this stage is whether to exploit the enterprises compliments and expand or keeps the enterprise stable and profitable providing a base for alternative owner activities.  At this stage, the enterprise has attained true economic health, has sufficient size and product-market penetration to ensure economic success and earns average or above average profits.

The enterprise requires functional managers to take over certain duties performed by the owner-manager.

Cash is plentiful and the main concern is to avoid cash drain.  Professional staff members come on board see out article on building the right team to scale up (http://viffaconsult.co.ke/building-the-right-team-to-scale-a-start-up/)

However, the owner-manager and the business increasingly move apart to some extent.Many enterprises remain at this stage.  The product-market niche of some enterprises does not allow growth.  Other owners actually choose this route.

If the enterprise can continue to adapt to environmental changes, it can continue as it is, be sold or merged at a profit or subsequently be stipulated into growth.  If the enterprise cannot adapt to the changing circumstances, it will either fold or drop back to a marginally surviving enterprise.

If this stage is successful, the enterprise can proceed into stage four.  If on the other hand, the stage is unsuccessful, the causes may be detected on time otherwise retrenchment to survival stage may be possible prior to bankruptcy or a distress sale.

Stage 1V – Take of

In this stage, the key problems are how to grow rapidly and how to finance that growth.  The owner has to ask himself two questions:-  The first question is if the owner is able to delegate responsibility to others to improve managerial effectiveness of a fast growing and increasingly complex enterprise

The other question is whether there will be cash to satisfy the great demands growth brings which often requires a willingness on the owner’s part to tolerate a high debt-equity ratio and a cash flow that is not eroded by inadequate expense, controls or ill-advised investment brought about by owner impatience.

The key managers must be very competent to handle a growing and complex business environment.  The owner and the business become reasonably separated, yet the enterprise is still dominated by both the owners presence and stock controls.

If the owner rises to the challenges of a growing enterprise both financially and managerially, it can become a big business. If not, it can be sold at a profit provided the owner recognizes his/her limitations soon enough.

Often, the entrepreneur who founded the enterprise and bought it to success stage is replaced either voluntarily or involuntarily by the investors or creditors see our article on knowing the right to step aside (http://viffaconsult.co.ke/building-a-business-empire/) .  If the enterprise does not make the big time , it may be able to retrench and continue as a successful and substantial enterprise at a state of equilibrium or it may drop back to stage 111 or if the problems are too offensive, it may drop all the way back to the survival stage or even fail.

Stage V Resource Maturity

 The greatest concerns of an enterprise entering this stage are: – To consolidate and control the financial gains brought by the rapid growth and to retain the advantages of small size including flexibility of response and the entrepreneurial spirit.

The enterprise must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalize the enterprise by use of such tools as budgets, strategic planning, management by objectives and standard cost systems and do this without stifling its entrepreneurial qualities.

An enterprise in stage V has staff and financial resources to engage in detailed operational and strategic planning. The management is decentralized, adequately staffed and with an experienced team.  Systems are extensive and well developed.  The owner and the business are quite separated, both financially and operationally.  The enterprise has attained.  It has the advantage of size, financial resources and managerial talents.  If it can pressure its entrepreneurial spirit, it will be a formidable force in the market.