Small business failure in Nigeria.
Reasons for small and medium enterprises failure in Nigeria
Despite the growth in numbers of small and medium enterprises in Nigeria. However, more than 50% of businesses fail.
Businesses fail due to barriers like poor education, lack of proper planning, social and cultural norms etc.
The key competence entrepreneurs need are the transferable, multi-functional package of knowledge, skills and attitudes.
Although all individuals need these skills for personal fulfillment and development.
These skills are particularly necessary for business success.
Therefore, they should have been developed by the end of compulsory schooling or training.
Lack of education is not necessarily lack of formal education. It can also mean lack of awareness or a lack of entrepreneurial literacy.
Entrepreneurial literacy is defined as the “possession of skills for analysis, interpretation and understanding of one’s self and others, the social and business environment using all legitimate manners and means of communication and relationship to make informed decisions about enterprises and persons that relate either directly or indirectly with such enterprises”
From the figures above, majority of the enterprises in Nigeria are in the micro sector.
The entrepreneurship spectrum in Nigeria consists of a top end which has a small number of educated and innovative entrepreneurs while the bottom end has the majority, mostly uneducated and unskilled.
Therefore, the Nigerian informal sector continuum is characterized by the bottom end where most of these businesses are not registered.
Many of these entrepreneurs are uniformed and lack awareness of the need to have a business plan.
Some do not understand the need to have business insurance.
Not only that, many lack access to vital information that can help in research and development.
In addition, poor accounting and book-keeping practices also contribute to SMEs failure.
Since often the key person lacks adequate training, there will also be little or no training or development for employees.
Based on the aforementioned, lack of entrepreneurial skills is a major cause of failure of SMEs in Nigeria.
Social and cultural norms.
Social and cultural norms have both positive and negative influence on SME failure.
For example, in some instances the extended family support entrepreneurs with initial capital.
This is a very useful support for entrepreneurs, considering the challenges of getting loans from banks and other sources.
However, in other instances, family obligations negatively impact entrepreneurs and business owners.
For example, in cases where loans meant for business is diverted by entrepreneurs for family affairs.
Such entrepreneurs may divert money meant for business to maintain their large family size, parties and extended family demands.
In addition, social and cultural norms affect the issue of gender and entrepreneurship in Nigeria.
The number of women who participate and succeed in business is limited because in many cases, women are culturally prevented from running competitive businesses.
Also, in some cases, the relatively low education and skill levels of women, limit their access to the various support services.
Many SMEs in Nigeria particularly those in the manufacturing sector fail because of inadequate infrastructure and suport.
Yet manufacturing companies are critical to the growth and development of any nation.
SMEs in the manufacturing sector need good roads to transport goods and to ensure smooth access to market.
Unfortunately, bad roads lead to high transportation costs.
Also, poor roads disrupts linkages across key sectors.
Hence, SMEs hardly enjoy the benefits of economies of scale.
As a result of inadequate infrastructure, many SMEs find it difficult to access cheap raw materials.
This is because of the cost of moving raw materials from cheap areas outweighs the benefits.
Therefore, not only the SMEs lose out. Besides, farmers in the rural areas who are suppliers of raw materials too lose viable market for their produce.
Poor electricity supply
In addition, manufacturing SMEs suffer from poor electricity supply.
They are unable to produce to expected capacity. Consequently, many SMEs rely on alternative power supply such as generators which is not sustainable in the long run.
The main source of initial capital for SMEs tend to come from personal savings.
Many SMEs also rely on loans and gifts from family and friends.
However, SMEs in Nigeria lack access to long-term loans.
Most loans (when available to SMEs) in the Nigerian market are short-term. Yet, SMEs require to long-term patient capital in order to grow and become successful.
Short term loans are often repayable between 12 months. Such loans are useful for running the business (working capital).
However, long term financing is required for projects and acquiring fixed assets such as machinery and other equipment.
Other reasons for SME failure in Nigeria
In addition to the aforementioned reasons, other reasons for SME failure in Nigeria are:
- The concentration of management on the key man and lack of succession planning.
- Market competition.
- Multiple taxation.
- Economic conditions.
- Pandemics e.g. the Covid-19.
- Poor product quality.
- Lack for proper sales and marketing strategy.
Positive aspects of business failure.
In this section, we’ll show why failure is not necessarily a bad thing. Failure has learning points that can help your entrepreneurial journey.
Have you ever failed as a business owner in Nigeria?
You should embrace failure because it is probably one of the most valuable experiences that you will ever have the (mis)fortune to engage in.
A small business failure is a difficult and complex change from the expected and desired result.
Failure happens when an entrepreneur under performs and desired targets are unmet.
A business failure is connected to the way a small business owner conducts his or her enterprise.
That is, apart from external factors already mentioned. Failure is also influenced by your behavior and decision-making skills as a small business owner.
According to statistics 80% of businesses crash and burn within the first 18 months of starting up. Research also shows that about 50% of newly established businesses in European economies failed in the first 5 years.
Though this seems to be bad news; however, studies have also shown that the experience of failure may be crucial for entrepreneurship.
Failure is a learning experience.
Don’t be too quick to judge an attempt as a failure. Though painful, failure can be a source for the improvement of entrepreneurship knowledge and skills after the failure.
Entrepreneurial failure reduces uncertainty and can increase the effectiveness of opportunity recognition.
Small business owners and entrepreneurs who see failure as a learning experience are better able to improve their knowledge, capabilities and experience in seeing opportunities.
In addition, learning will take place when you see failure as a moment not a monument.
Failure is your friend.
Don’t mistake failure for a foe; it is your friend.
Your flop is not your enemy, desist from taking it too serious; otherwise, you’ll get too anxious about every action.
Treat failure as a friend who is there to help you.
By reacting positively to failure, you can laugh and learn from the experience.
Failure is not an end.
Use failure as a springboard to reach higher goals.
Failure is not an end, it is not final.
Every time you take a chance at doing something the probability of failure increases.
As long as you are living and willing to try new things, you will win some, but will still goof somewhere down the road.
Research has shown that failure can improve “entrepreneurial preparedness” for subsequent entrepreneurial activity.
Failure acts as a stepping stone for spotting and exploiting new opportunities.
People who dwell on their failure would probably end up failing again because of the constant thought about the fault, problem or fall.
Do you have a good idea, go after it, get out into the world and win.
Embrace failure as a learning experience. However, no matter how small, concentrate on your success instead of the failure.