Reasons for African small business failure

Posted on November 30, 2017 12:47 am

According to a researcher, about three quarters of small businesses in Africa cease operating within the first three years of starting. It’s an extremely daunting figure and something that’s thrown at many an enthusiastic business person who start a new venture. Had a chat with a business researcher focusing on Europe and African markets and I asked her the key reasons why small businesses fail in Africa so, hopefully, being an interested party in the region, I can avoid them. In her findings, over the last two years, the number of businesses coming into the African economic market has risen by 2%. Though some might consider that an insignificant increase at first, the additional 2% represents an increase of 5,400,000 new businesses in Africa.However, though this might appear to be a positive development for Africa’s economy, the reality is that, according to the data, 70% of those new businesses will likely fail or wind up within the first three years of business.Some of the cited reasons for this high rate of failure for African business include inability to recover debt, a common concern for all business large and small. In countries like Nigeria and Ghana, ventures are known to attempt to finance future growth with money they don’t yet have and end up putting themselves in trouble.In whole of West African region, some industries are known to be more prone to this dilemma than others. Tradesman and those that provide services and are paid upon completion are among the most susceptible. The same region also fails when it comes to due diligence when buying or starting a business.Failure by business owners to do homework before going into the venture is well documented in the region. In most cases, enthusiasm and excitement override thoughtfulness and strategy. She believes that lack of thoughtfulness and strategic planning is especially evident regarding online business which has become prolific because it is so easy to get started.

Another key challenge in many cases, the poor financial management leads to business failure in the region as a result of inadequate planning, organizing and controlling of the financial activities of the startup.One of her report, revealed that around 76% of small business lacked basic strategic management regarding its financial operations.An inadequate cash flow or high cash use without strong financial management and planning invariably leads to disaster. In her own words, not preparing adequate business records to enable an understanding of how the business is performing is like trying to ride a bike backwards from top the hill whose end results is catastrophic. The need to be on the job and earning money usually takes precedence over the office work and financial management. She does also say that in order to achieve success, small businesses needs to have clearly defined financial goals and continually understand the progress of their business compared to those goals and financial reporting is the only way to achieve it.Documenting the business plan and financial records and knowing the true state of business at any time is the only certain foundation for future plans and longevity.It is also common in Africa to see people in business for the wrong reasons, in her work, she found business owners didn’t have a primary reason for starting the businesses.Most people always do so to prove to their successful business friends or family that they’re as good as they are, by setting themselves up for failure and only those that are passionate about the venture and its potential impact succeeds as they understand setting goals of how they expect to get there.They also get appropriate advice as African business owners assume that because there is boundless sources of information online, they’ll be able to find the answers to all their problems. In her own words of wisdom, she says there is no substitute to sitting down with an advisor who can show how the pieces are supposed to connect, where things are going wrong, and what one need to do to fix their business before it fails.

Contador Harrison