Why do small businesses in Africa fail? The World Bank Group suggests that between 365 – 445 million SMEs are operating in emerging markets. The relevance of these SMEs cuts across localization of products is innovation. It gives them leverage to contribute immensely to the development of their host communities in various crucial ways.
The potential for growth and societal change in Africa is massive. However, not all SMEs here have the necessary support structures or systems in place to allow for their growth and sustainability. A large number of SMEs fail to achieve maturity. A number of them eventually die, with an estimated ratio given at five in ten per year.
Entrepreneurship is inherently risky and so it should come as no surprise that a large portion of entrepreneurs and aspiring business owners fail. Studies have shown a full 20% of small businesses fail in their first year, 30% in their second year, and 50% by year five. According to the Small Business Administration (SBA), only about 33% of small businesses make it to 10 years or longer.
Reasons Why Small Businesses in Africa Fail
Growing an SME in Africa is daunting owing to the many prevailing challenges in the region. These challenges range from governmental and environmental factors to issues emanating from the business owners themselves. Whether you’re a seasoned small business owner or an entrepreneur just starting, these statistics can be a little scary. As a new entrepreneur getting ready to start a business, there is a lot of uncertainty ahead of you. You are probably being reminded by family and friends how unlikely it is your endeavor will succeed.
Well, while there may be some truth to this, you shouldn’t let it kill your entrepreneurial spirit. Your best foot forward would be to understand the major reasons why small businesses in Africa fail. If you understand the mistakes of others, you can avoid following in their footsteps. That being said, here are the top 5 reasons why small businesses fail in Africa:
Lack of Basic Business Knowledge Or The Necessary Skill Set.
This is one of the top mistakes made by entrepreneurs in Africa. Every intending business owner must have ample knowledge about the industry they are entering and their competitors. They must also know about the target market, existing market trends, advertising and marketing techniques, and patterns as well as financial know-how.
As information keeps changing, new data emerges to replace old beliefs and trends. Getting the vital information they need timeously is a huge obstacle to some African small business owners and the result is a delay in the production of effective solutions to whatever challenges their businesses face.
Not possessing the right information needed to start up a new business is like groping in the dark hoping to find some light after delving in. If you are not prepared or if you lack the basic understanding to operate in your chosen niche, then take up opportunities to educate yourself. Do proper research, make inquiries, ask other business owners in the field, read relevant books and visit relevant websites.
Access to Finance Or Insufficient Operating Funds.
This is one of the major reasons why most small businesses in Africa fail, especially at their beginnings. Regrettably, most small business owners in Africa have no idea where to get the funds they need so badly to start with. It is crucial to understand that most businesses take a year or two to establish themselves and during that period they will need to keep the lights on and staff paid.
New small business owners often don’t understand cash flow or underestimate how much money they will need to get the business started. As a result, they are forced to close before they have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.
Before starting a business, entrepreneurs must ensure that they have enough money to sustain that venture for at least up to two years, then slowly and patiently build right up. A way out here is for African entrepreneurs to explore various ways of funding their businesses themselves or check out different organizations that offer capital services to small businesses. Other options are forming partnerships, seeking out investors, and getting business grants and loans.
Poor Planning
Most African business owners are not patient enough to put a plan in place before commencing. Many businesses start with an idea for a product or service, which, in principle, seems certain to result in commercial success, but ultimately fails due to lack of understanding and a business plan.
Most small businesses in Africa are brought into existence for survival. The business owners simply register a company and hope everything will just be fine. There is no detailed plan on how the business is going to be run. There are no well-defined short-term and long-term goals. As a result, there is no understanding of costs, responsibilities, markets, funding needs, and other requirements of the business. Before long, the owners of the business run out of steam and find themselves back to the drawing board.
All small businesses need a business plan. Even those businesses that do have a business plan can fail if their plans are unrealistic and not based on accurate information. Planning in business can make the difference between a thriving, money-making company and a business on life support. A business plan forces you to define your Unique Value Proposition (UVP) — what differentiates your project from its competitors.
Therefore, business owners must have a clearly defined plan for their business. Planning all things and ensuring they are done on time is very important for business success because this way, SME founders can try to attain accuracy and then hold on to that routine.
Underestimating Administrative Tasks.
Many small business owners underestimate the importance of efficiently carrying out their administrative duties, which is why many fail. From inventory management to managing employees to all the bookkeeping and accounting involved in the endless quest to meet your financing goals and turn a profit, administrative responsibilities matter if you want to succeed.
According to a poll conducted by SCORE, 47% of small business owners dislike the costs associated with bookkeeping, and 13% dislike the administrative headaches and the amount of time it sucks out of their workday. Understandably, looking at spreadsheets all day can be mentally daunting, but it still needs to be done.
There is no quick fix here so be prepared. Take on as many administrative tasks as possible but remember that delegation is your friend. Hire accordingly and outsource many of your routine tasks to technology. Shortcuts like these save you time, and in business time is money.
When There’s No Niche or Market For Your Services.
One of the most common reasons for business failure stems from having a poorly defined niche. A niche refers to a target market or area of specialization. If you try to make your business attractive to everyone, it will end up being attractive to no one.
The best business ideas will fail if there isn’t a market for what you sell, or if the market suddenly disappears because of economic changes or natural disasters. While you can’t predict disasters, before you start a business you need to determine if there’s a market for what you plan to sell and if that market is big enough to be profitable.
It’s better to specialize. The narrower your market, the better your odds of speaking to the very people you want to serve. Market yourself as an expert in a specialty while showcasing yourself to the narrow market that can benefit most from your services.
Your niche or market must be an identifiable group of customers you will be able to reach with the marketing resources you will have available.
Conclusion
At the end of the day, operating a successful business is not easy. It’s not something you can leave up to chance or luck. Consistent action is one of the most important habits to cultivate if you truly want your SME to succeed. You must be committed for the long-term because it’s going to take time to build your business. It’s important to be aware and think preemptively about what you can do to tackle each challenge when it arises.
Make a daily commitment to take one action that will increase your visibility or credibility in your chosen industry. You’ll be surprised at how quickly these little steps add up and transform into much larger successes within the next few years.