There is this general assertion that 90 out of every 100 SMEs fail within the first 5 years of their formation, while 9 out of the remaining 10 start winding up after year 5. While the source of these widely publicised statistics may be unconfirmed, the fact remains that small businesses struggle to survive in Nigeria.

If you ask 10 business owners in Nigeria what their greatest challenges are, 8 of them will identify lack of capital as their primary challenge. But I have always posited otherwise. Difficulties in raising capital may be one of the problems, but there are more fundamental reasons why small to medium scale businesses struggle in Nigeria and this write-up attempts to discuss 11 fundamental causes of business failure with the objective of guiding business owners from falling into same pitfalls.

1. What product or service do you really provide?

This is one question every business owner must have a definite answer to. A business cannot do everything that brings money. You often hear business owners categorise themselves as general contractors. They are ready to embark on any business that brings money, be it construction, supplies, logistics just name it and they can do it. I see this category of businessmen as more of hustlers than entrepreneurs. They just want the bucks!

Now think about it? If you do any business deal that comes your way, how do you gain mastery of a particular business line? No matter how beautiful the opportunities may look, if your company isn’t into that line of business, then you need to think very carefully before jumping in it. Often times, such opportunities are laden with many hidden pitfalls and as a greenhorn in the “new field”, you don’t get to see such pitfalls as your focus is primarily on the profit.

Every business owner needs focus and consistency. You must be a master in your chosen business line.

Losing focus by jumping at every “opportunity” outside your primary field will only end up dragging you behind.

2. Diversion of funds

Just at the point of commencing this write-up, I received a call from an old friend who was seeking advice on a business he was planning to embark on. He complained that the manufacturing company he was working for had not paid salaries for over 3 months. In addition to that, a commercial bank had started exerting so much pressure on the company to recover a 20million Naira debt advanced to it to facilitate business expansion but which was diverted into a ‘high-yield” government contract. Unfortunately, the “high-yield” contract was revoked.

The scenario above is a very common occurrence in this part of the world. Business owners must be disciplined to overcome greed. The quest to make quick money has been the major undoing of many business owners who venture into other business opportunities they don’t even know anything about, out of the desire to make more money quickly.

It is good to take risks. But the fact that businessmen should take risks doesn’t mean you should jeopardise the destinies of the company and the other stakeholders by diverting funds meant for the business into a completely different “business opportunities” or any other non-operating project without sound and objective scenario planning.

Please don’t get me wrong. I am not saying business owners cannot take other opportunities when they come. What I am emphasising here is that such action must be taken after careful analysis of the opportunities and how such investment will affect the well-being of the existing business line. Businesses live on cash, and any attempt by business managers to starve a business of cash, due to greedy re-investment in other opportunities outside the business line, could be very destructive.

 

wood-architect-table-work

3. Poor knowledge of financial management

You often hear advice such as you are a good cook; you should do well in a restaurant business. This suggests that doing business requires only passions and skills. But the question is, why do businesses run by people who are passionate and technically sound still fail?

Every business does 3 fundamental functions: Operations, Marketing and Finance.

While structured organisations have the capacity to employ competent people to perform these critical functions, small businesses often rely on the business leader to champion these functions. Unfortunately, most business owners only have passions and skills which may only be sufficient to succeed in Operations and Marketing functions. An average business owner uses the rule of thumb to manage the company finances.

A fair understanding of Accounting, Bookkeeping and Finance can change the fortune of your business. Every business owner must have at the click of a mouse his company’s key financial data such as values of receivables, current inventory level, monthly revenue, monthly profitability, business net asset, balance sheet size etc. If you are a business owner and you cannot provide these data about your company in minutes, then you have some work to do.

Every business owner must have at the click of a mouse his company’s key financial data.

A former neighbour of mine once acquired an operating asset with a personal loan collected from a commercial bank. The repayment tenor for the loan was just 6 months while the breakeven period of the asset was about 2 years of optimal operations. Due to his inability to meet his obligations on the loan, my neighbour resorted into borrowing from friends and family members when the pressure of the Bank mounted. The mistake was clear; he had used a short term liability to acquire a long term asset thereby creating a cash flow mismatch.

I have not said you should not go into business if you are not an Accountant. No! I am simply saying, just as you understand the operational dynamics of your business, you must strive to understand the financial dynamics as well. Even if you decide to employ an Accountant or outsource the finance function, it is still essential for business owners to have a fair knowledge of finance. You can attend short courses and relevant seminars or read finance related articles online. It will really help.

4. Company not treated as a legal entity

A business can be formed as a sole proprietorship, a partnership or a limited liability company. While the sole proprietor and the partners are not really separated from their businesses, the owners of a limited liability company are different from their company.

By CAMA, a company is a legal entity separate from the shareholders or managers. Its affairs must be separate from the owners’ affairs. This includes the bank accounts and other assets and liabilities of the company. Unfortunately, in Nigeria, most small business owners don’t treat their companies separate from themselves. They are the Chairmen/CEOs and thus have the right to take monies from the company accounts for personal use without refund.

A business owner, who also works as an employee of his company, must pay himself a salary. While such salary must be good enough, it must also be affordable by the company. Aside salary, a business owner working as an employee of the company can be entitled to bonuses and profit sharing just like the other employees. He is however entitled to a dividend as a shareholder of the company. It should be emphasised that profit sharing and dividends are paid from net profits.

Thus, if you are a business owner and working for your company, see yourself as, 1. A shareholder who is compensated by dividend; 2. An employee who is compensated by salaries, bonus and profit sharing. Stop unbridled withdrawal of funds from company bank accounts for personal use, otherwise, you will not take that business to the next level.

5. Wrong parameters for measuring business success

Most entrepreneurs are under pressures to succeed. This is partly driven by the pressures their families, ex-colleagues and friends directly or indirectly place on them. There is a myth that once you work for yourself, you must ride a very big jeep to show for it and if this is not the case, your business is not doing well. Unfortunately, business owners also key into this psychology. They do everything to live large even at the expense of their businesses. They just need to impress that business is good, even if in the real sense, it is not.

I once heard a gist of how an hotelier inflated the cost of completing a building project which he was proposing to use for his hotel business and eventually succeeded in seeking a debt from a commercial bank on the inflated budget. Immediately he received the first disbursement, he bought 2 beautiful brand new SUVs, one for himself and one for his wife, and everyone believed the business was good. To cut this long story short, after few years, the hotel was taken over by the Bank as the cash flow from the business became insufficient to meet the monthly obligation on the facility. This was because the hotel was expected to pay back a debt that was never invested into it.

I once shared on twitter that entrepreneurship is habitual. It reflects in all your decisions as regard investment, family, life and other areas, not just in business. As an entrepreneur, every kobo that you spend must create value.

Entrepreneurship is habitual. It must reflect in all your decisions as regard investment, family, life and other areas, not just in business

The fact that your ex-colleagues who are still in paid employment now drive big cars isn’t enough reason why you need to strain your business in order to get one. As I often share with entrepreneurs, your colleagues in paid employment salute your courage. They also crave to leave the rat race someday. So why do you, as an entrepreneur, still try to partake in the race?

6. “I want to grow fast” syndrome

It is a good thing for businesses to grow. But it is a dangerous thing for business owners to pursue growth at all expenses. An average Nigerian entrepreneur wants to be a Dangote overnight, forgetting the fact that the business life cycle must be traversed.

Businesses should grow organically. Growth should be pursued only when the business has the capacity to withstand shocks.

When you pursue growth at all cost, it simply puts pressure on the finances of the business.

A potential business partner opened up to me on how he got a facility of over 60million Naira from a commercial bank to buy some brand new trucks to expand his haulage business. He had got a contract from a shipping company to move its containers from a wharf to its terminals and used the same contract to secure the said loan. While the bank advanced the credit on the merits of the contract and the financial projections, they failed to consider the operational capacity of the company to effectively utilise the assets. Due to operational inefficiencies, the business could not meet the monthly obligations on the facility, while the Bank continued to charge various penalties on the loan.

I am a strong proponent of business growth. Of course, a lot of benefits come with size. But my grouse is inorganic or forced growth.

A growth that is forced on the business will not last.

From experience, the best time to grow is after the business has survived its storming stage. At that time you are likely to be a master in that business and every additional investment will bring the desired results.

 

photo-1427751840561-9852520f8ce8

7. Over exposure to loan

As an offshoot of the point above, too much of bank debt especially at the early stage could be inimical to the going concern of a business. Too much of gearing puts businesses under pressure. Before a company approaches a bank for a loan, the capacity to repay must be ascertained. And what I also advise is that there must be other sources to repay a bank loan in case the primary source fails.

Business is a going concern. There is no need to rush into bigness.

Business owners should also consider other options to raise capital for business expansion. Equity, Joint Venture arrangements, Venture Capitalists are few other ways to raise funds that will exert lesser pressure on the company. A business owner should consult financial experts or more experienced entrepreneurs for advice on the source of funding that would be best suited in a particular circumstance. Unfortunately, many business owners see bank loan as a rare opportunity and jump at it without careful analysis.

In an article I read about Mrs Kehinde Kamson, the founder of Sweet Sensation and one of my business role models, she didn’t rely on loans to fund her business at start up. Her first loan of 5 million Naira was collected in the fourth year of her operation. She ploughed back the business’ profits and lived an austere lifestyle to support business growth. Today, all these are history.

8. Lack of objectivity in decision-making

The primary responsibility of every business leader is to make decisions. Business owners at times get too emotive in their decision making and take critical business decisions subjectively rather than on facts. When we started our company, we employed over 5 office staff and some of these employments were out of emotion. When operations didn’t go as planned, we didn’t have a choice but to lay off some of these staff in a bid to reposition. The same staff who we employed out of emotion still challenged us to pay their outstanding salaries if at all we would sack them, even when it was clear that the company ran at a loss throughout the period in question.

Business leaders should be very frank, objective and fair in making decisions. You should be ready to fire a staff who consistently is under-performing. You should be bold to move your account if your bankers cannot give you reliable services. You should be ready to change a supplier if he is not giving you a competitive rate. It is business and the best decisions that most favour the company must be taken at all times.

9. Poor bookkeeping

Most small scale businesses fail to keep records of business transactions done by the company. A company is a legal entity and as such, all its dealings must be well recorded for reference purposes. If you are a business leader and you pay staff salaries from your personal account and give out personal cash to buy diesel to fuel the generator, without somehow capturing these transactions on a system, then  you are simply doing the wrong thing. Every income realised, the expense incurred or any other transaction type done by a business must be properly recorded.

When you fail to record business transactions, it becomes difficult to monitor the progress made by the business in a period of time. It also becomes difficult for potential investors to put money into your business. Historical data are a fundamental resource for effective decision making in businesses.

Small businesses should at least have a Profit & Loss and a Balance Sheet Accounts, which should be updated on a daily basis. Doing this helps monitor business progress as well as making effective business strategies. For instance, a business leader must know the daily financial position of his company. He doesn’t have to wait till the last day of the month before realising he has not met his revenue target for the month.

Several web based accounting software now exist which  small businesses can easily subscribe to. Examples include Sage, QuickBooks, Peachtree, Tally ERP etc. The service of an accountant may be required in this regard.

10. “Business” vs. “Institution”

The objective of every business owner should be to take his business to the next level. Sweet Sensation started from a shed in the backyard of the founder’s family home. Today with over 30 outlets, the business has definitely acquired a life of its own and surely independent of its founder. That is a typical case of institutionalising your business.

If after several years in business you still don’t have competent and stable staff handling key functions for the company, the going concern of your company is at risk.

Many small business owners fail to look beyond their immediate level. They run their businesses myopically that it remains just a business after several years of operations. If after several years in business you still don’t have competent and stable staff handling key functions for the company, if all decisions are still taken by you alone, then the going concern of your company is at risk. The danger of not institutionalising your business is that once you are absent for a period of time, your business remains at a standstill.

Institutionalising your business isn’t really synonymous to big size.

It simply means you have created efficient organisational processes, structures and policies which guide all employees within the company. Any new staff coming into your organisation simply keys into the existing “philosophies” of the company. If you can achieve this, your company will achieve a lot of progress even in your absence.

11. Lack of coordinated marketing strategies

All businesses perform 3 fundamental functions: Marketing, Finance, and Operations. While all these 3 functions are very germane to the success of all businesses, any successful business must deploy adequate strategies in the area of marketing. An effective marketing strategy will help a business penetrate its target market with its product or services.

Business owners must consistently deploy marketing strategies if they want to continue in business. Marketing strategies such as segmentation, branding, advertisement, social media presence etc. are important activities all small businesses should engage in if they want to be successful.

Unfortunately, most businesses lack any coordinated marketing plans or strategies. Most business owners are enmeshed in the day to day operations of their businesses that they lose focus on the integral function of marketing.