Death of small businesses starts when they operate informally

By John Njiraini

In a span of two years, Moses Mukua had climbed to the pinnacle of entrepreneurship, seen his business crumble and today he is a frustrated man.

Two years ago Shillings and Sense carried the story of Mukua, the then 27-year-old was a second hand clothes dealer at Sunbeam Shopping Complex on Mfangano Street, Nairobi.

Operating a stall sagging with stock worth about Sh400,000, he used to make an average of Sh120,000 a month after deducting all expenses.

A mobile phone stall in Nairobi. Research shows few small business survive to their third birthday. [PHOTO: STAFFORD ONDEGO/ STANDARD]

Today, however, the situation is different for Mukua, who is now a matatu driver.

"Business deteriorated after hawkers invaded the city centre and I decided to close shop," he said.

critical players

Mukua is not alone and in many ways his is a story that befalls many small businesses.

Though small businesses are critical players in the economy in terms of employment creation, many of them are a troubled lot with majority dying before their third birthday.

According to the Ministry of Industrialisation, small businesses contribute 30 to 40 per cent of the gross domestic product and are the source through which 80 per cent of the population earn a living.

Despite their importance, they face numerous challenges that make it difficult for them to grow and move to the next level.

Though most entrepreneurs strive to register their businesses and comply with all legal requirements including tax laws, the bureaucratic processes they have to endure is frustrating.

This makes most of them opt to operate informally, a recipe for closure.

"Small businesses operate in very tough conditions and rarely do they get the necessary support to help them grow," said Mr Mwangi Wanjumbia, a management consultant at Newtimes Business Solutions.

What makes budding entrepreneurs struggle to start small businesses with a lot of hope and zeal only for them to die after a few years? For most entrepreneurs, the answer is usually the same and predictable: Things did not work out. According to experts, small businesses die quickly because the proprietor often lacks relevant information, education and skills that would enable them run a business.

Though most assume a business is simple and does not require any special skills, tasks like balancing the books and filling for tax returns become complex and end up crumbling the business.

college education

Many researches show that businesses run by entrepreneurs, with at least a college level education, outperform those without.

Inadequate education, compounded by lack of managerial training and experience, makes the proprietor of the business to run it based on whims and moods instead of sound business

management techniques.

And because most small businesses are a one-man-show, survival chances are limited because management of the business is basically a gambling process and hoping that all turns out well.

Besides, the high taxation regime has forced many of then to invent methods to beat the system but die as soon as they are netted and forced to pay taxes.

Another major cause of high mortality among small business is lack of credit for expansion.

Lack of access to credit comes in many facets. This could range from lack of collateral, a problematic cashflow system, tattered credit history of the proprietor to exorbitant interest rates and bank charges.

Taking into account that commercial banks and other lending institutions consider small businesses as high risk borrowers, it thus becomes impossible for the former to lend unless under tough conditions.

Some of these conditions include the lender purchasing a certain equipment that serves as the collateral for the loan.

Unfortunately for small businesses, few can comply with the conditions forcing them to remain small or close shop altogether.

soft loans

Lack of credit from credible institutions force small businesses to turn to friends, relatives, shylocks and pyramid schemes as they offer soft loans with low interest rates but the end result is often catastrophic.

There is also the issue of competition. Most entrepreneurs in a certain area are wont to operate similar businesses thus resulting in stiff competition.

The survival-for-the-fittest tactics employed in such scenarios mean that only the strong businesses survive while the rest go under.

Another cause for SMEs demise is lack of access to critical information.

According to studies, access to information on things like markets, new technologies, changes in government policies among others are critical components of successful enterprises.

For small businesses, however, this is often not the case and most find themselves running on obsolete technologies due to lack of the necessary information.