What are the main financial challenges SMEs face in Africa? Read this post to find out so you can avoid them.
In Africa, SMEs provide an estimated 80 percent of jobs across the continent. This makes them an important driver of economic growth. But it takes a lot of strength to keep a small business running.
Even though small and medium-sized businesses (SMEs) are autonomous, non-subsidiary companies that employ a certain number of employees. For these businesses to grow, create more jobs, and generate economic growth, they need access to capital. According to a World Bank report, Nigeria ranked 131 out of 189 countries regarding the ease of doing business. As a result, 80% of new small businesses fail in 3 years.
Financial Challenges SMEs Face in Africa
Small businesses encounter numerous issues every day. These issues range from difficulties hiring new employees to preserving product relevance. However, financial difficulties frequently loom the largest. This is because finances are the backbone of all operations. A business can continue to operate if its financial status is stable. However, too many financial difficulties can cause even the most well-oiled engine to sputter and stall. Here are some five financial challenges SMEs face in Africa:
No Access to Extra Capital
Access to startup funding has always been a problem for small businesses and entrepreneurs. Most African banks require businesses to satisfy several conditions to qualify for a business loan. This is because they are less prepared to take a chance providing money to start-up companies.
Having enough cash on hand to cover some expenses or minimum operating expenses each month is great, but it can only take you so far. As a small business, you may be unable to hire new employees, expand into new areas, or take advantage of new possibilities due to a shortage of capital. More working capital can help you focus on long-term growth efforts. According to this 2018 survey, 49 percent of business owners say they want to spend any additional capital on expansion.
Accessing extra capital is key if you are looking to explore new business opportunities. Even though there is a major limiting factor in getting approval for business credit. Also, before you move forward with financing, get clear on how you would use any extra capital and check out your options to see what makes the most sense to help you grow your business.
Inconsistent Cash Flow
Many businesses struggle with managing cash flow. Liquidity is a persistent problem, ranging from just covering expenses successfully each month to building up capital to invest in growth or expansion. In fact, it does not matter if you have assets as a business owner, without consistent cash flow for your business then it means you are unable to expand your business.
Having a consistent cash flow is not only about covering significant ongoing expenses like salary and rent, you also have to pay taxes, settle vendor bills, and buy supplies and equipment merely to run your business smoothly. So the best approach to increase cash flow for businesses create clear payment terms, invoice properly, provide discounts for early payment, and make it simple for clients to make payments.
Unable to Stick to a Budget
Budgeting is another frequent challenge for businesses. Running a clean operation requires strict adherence to budgets. This means you must keep a close eye on spending accounts and make prompt changes when necessary. You can develop a budget and compare actual results to expectations.
But you need to make a reasonable budget for your company’s objectives and potential revenue. To start building your budget, check all your income sources to get a sense of your available money. Include your sales figures, investment profits, and any receivables you may have. After that, add up all of your fixed costs, such as rent, equipment leases, or loan payments.
After you’ve created annual and quarterly budgets, start scheduling monthly budget reviews to ensure you’re on track. Reviewing your budget regularly gives room for accountability.
Unforeseen Expenses
Any small business’ best-laid plans can be derailed by unexpected expenses. A designated account where you can amass a rainy day fund will give your business a cash reserve that can see you through difficult times—or help you develop when the time is right. It’s simple to overlook the costs you can’t forecast when you’re already preoccupied with managing a large number of recurring business expenses. This can put in your business into a potential crisis.
Incurring Debts
It’s not uncommon for business owners to incur debt when starting their enterprises. This is because entrepreneurs are justifiably proud of having “bootstrapped” their way to success. However, there is such a thing as excessive business debt. Perhaps you have utilized a personal credit card a little too much, or perhaps your local bank has provided a line of credit that is now exhausted and carrying a high-interest rate.
Depending on which debt vehicle was tapped into, these circumstances may have a major short- and long-term impact on the organization. For instance, it may take some time for a company to have positive cash flow, and in the interim, it must continue to pay its overhead, suppliers, and staff.
Conclusion
All businesses face financial difficulties, but small business owners seeking to launch without going bankrupt are affected the most. This is because, compared to large companies, SMEs encounter additional challenges when raising capital. This is because many banks prefer to give their resources to large businesses since they have a lesser chance of default and because their financial accounts are clear, but SMEs do not, which causes cash flow problems and other financial challenges.
Meanwhile, you should check out other articles for small and medium business owners on SME360.