Why 8 out of Every 10 Businesses in Africa do not Survived the First 3 Years

Many businesses in Africa seem to go into extinction in their first 3 to 5 years of existence. A statiscal survey conducted shows that 8 out of 10 startup businesses do not survive in their first 5 years, while this could be worrisome to militate against the propelled engine growth of the continent’s economy, respondents in Africa and in other regions believe that 20 years from now, its combined GDP will be among the fastest growing in the world. If this futuristic optimism seem true why then the abysmal failures of so many start establishments across the continent?

African entrepreneurs are often too focused on running their businesses that they don’t take the time to forecast properly, strategize or identify current and future threats or risks that could significantly affect their business, or worse still, kick them out of business. In today’s digital age and inter connectivity, one disruptive idea or business in a faraway country can totally change the landscape of your industry or market so fast you may never find the time to think or plan.

The world today is a global technologically driven village, where changes and trends in both the local and international market place will be one of the biggest risks that African entrepreneurs and businesses are likely to face. With a growing number of foreign businesses and brands increasing their footprint in Africa, even small family-owned corner shops and neighborhood businesses may not be spared.

Some of these prevailing factors listed below are reasons for business dearth in Africa’s emerging economy.

Poor Forecast and strategic Planning

In starting a business planning and a good forecast on what is expected of the business is vital, from its capital sourcing to type of operations in terms of products or services to business systems and structures and even the sale of the business is important. So that with proper business plan in place couple with the mission and vision of the establishment you can tell the end of the business from the beginning.

Africans typically don’t like to think or talk about death, grave misfortune or permanent disability. Nobody would wish for any of these, but they’re some of life’s risks and realities. And we must always consider, and plan for them. However, while human life is finite and vulnerable to death and misfortune, a business can ‘theoretically’ live forever. In business accounting terms it is called “going concern”

The best time to find a successor with the right level of commitment, vision and zeal to lead a business beyond the lifetime of the founder isn’t when the founder retires or is on his/her deathbed.

Finding the right successor to take the reins of a business is a conscious, deliberate and calculated process (or decision) that should not be left to chance, or emergency situations. Actually, the earlier the process of succession planning is started in the life of a business, the better. Once you have identified the likely candidate(s), it’s important to get them more involved in the business and groom them for leadership. They need to understand the nuts and bolts of the business and share a strong interest and passion in growing it into a bigger and better organization.

Absence of structure and business systems

One key trait of successful businesses, especially those that have existed through several generations, is the existence of a clear structure and business systems that help the business to operate effectively. Structure is essential to every well-run business because it provides order, assigns responsibilities for key activities and improves accountability. Many African businesses cannot function independently of the founder and this is dangerous.

Nigeria has lost businesses worth billions of dollars to board room squabbles, financial malpractices and other corporate governance issues in the past two decades, the Chairman, Heirs Holdings Limited, Tony Elumelu has said.

He spoke at the Institute of Directors (IoD) Fourth Presidential Biennial Conference with the theme: ‘’Building a global conglomerate on corporate governance issues: Challenges and benefits in a developing economy’’.

He said businesses established and funded by Nigerians have gone down the drain because their owners failed to introduce and implement sound corporate governance frameworks.

He said this has resulted in the death of many companies, as well as loss of huge capital funds. He said General Electric (GE) was able to grow its market capitalization to $234billion in May this year because it put sound corporate governance policies in place, adding that only few businesses in Nigeria outlived their owners.

He explained that family businesses die with their owners because there was no good succession plans in place.

He also said: “In Nigeria and Africa in particular, we have not been able to grow our businesses to outlive us unlike what happened to General Electric, a United States – bases power conglomerate. There was nothing like succession programmes, zero tolerance for contraventions, compliance to capital market rules, integrity of the directors and other issues.’’

Business systems are also very important. How many medium-sized businesses on the continent actually have policies and procedures that govern everything from recruitment, employee conduct, finance and accounting, among others?

How many businesses actually keep accurate and up-to-date records of their activities, including complete information about operations, finances, transactions, customers, suppliers, employees and everything else? It’s not surprising then that the most critical information and records concerning most businesses are housed in the heads of their founders. They seem to be the only ones who know where everything should be and how the business should run. With this kind of confusion, it’s almost impossible to run a business without the founder.

Inadequate Sustainable Financing

Many startups need continual sustainable financing for periods longer than their counterparts in the western advanced economy like Europe or North America simply because they have a higher attrition level.

Jitesh Naidoo has been involved in many African countries and focuses on project management, project inception, monitoring, electronic auditing systems & trade facilitation. He runs a logistics company called Carthago Import and Export. He also serves as the Chairman of the South African Cross Border transporters Association and assists in micro startups with mentoring + building and finding markets for their products. Some of the factors he takes into consideration for his research includes looking at the type of project, its geographical location, economic factors in favor and against, political climate, profile of entrepreneurs, management style, capital on inception and capital on closing & post mortem analysis. He concludes, ‘I hope I can be of some assistance. Through my experience, I have isolated some reasons why many (more than 87%) African startups fail. It is important to mention these numbers change greatly from country to country and from one geographical basin to another (eg. from East Africa to West Africa). But overall a few common factors seem to be emerging.

Asked about the origin of his research on why African startups fail he explains, ‘Having traversed the African continent for many projects, from working on oil projects in Nigeria to sisal plants in Mozambique, I found that the success rate for most projects was dismal and sought to find out the key reasons for the high failure rate..’ He continues, ‘Funding organizations like the World Bank have pumped in billions of aid dollars into Africa and have seen very little return. As a result some very good projects have been given the thumbs down due to historical risk factors. I hope that we can turn things around and those who are indeed worthy of receiving such aid, will be beneficiary thereof.’

The absence of infrastructural support. Many African countries lack the infrastructure that is needed to support startups like access to good communication, logistics, legal, financial and economic support. At the end of the day it all adds up to the demise of an enterprise that might otherwise have had a rosy future had the above factors been in place

Blind to business trends and changes

Access to good networks is important as they can provide support, inspiration, motivation and a platform to market business and gain new customers. It is important for African entrepreneurs to network themselves for greater synergy to boost the engine system of the individual economies of Africa.

Another strong feature of businesses that last beyond a generation is their ability to adapt. In a world of constantly changing markets, consumer trends, socio-political influences and outright disruption, adaptation is a key strength of businesses that will survive today and in the future.

Cultural factors also are a bane with startup business, very often family members are linked in to assist. Very often complex web of cultural factors come into play and almost always it is disastrous. Family views the enterprise as a cash cow and not a business. If stock is involved they often help themselves to the stock without accounting. Furthermore because it is family, there is very little incentive to work hard and it is not long before the venture fails.

Starting for the wrong reasons

If you start a business for the wrong reasons, it is likely to fail. Starting out simply to make money, gain spare time to spend with family or answer to no one but yourself, is dangerous. “You need to have a passion for the industry that you are going into to sustain you through the tough times, so don’t go into business for the wrong reasons,”

A flamboyant lifestyle with a wanton display of fancy cars and homes, globetrotting, expensive clothing, extravagant spending, and lavish displays of wealth are often common. I guess prudence and moderation are hardly metrics to live by, especially when it comes to showcasing your success to friends, family and associates.

A dominant lifestyle mentality does two dangerous things to the longevity of a business. It is a blind distraction to the business and it sends a wrong signal to employees and potential successor.

The wrong skill set and knowledge

Before starting up, think about your unique selling point. The differentiation could be superior skills or service or better or cheaper products, but there must be something that makes you special. Without this, you will surely fail.

A lack of information can also contribute or lead to failure. Reading business books, magazines, website articles and blogs and talking to other business owners is something that everybody can do to gain knowledge and improve their skills.

“Lack of basic business knowledge is another reason for small businesses failure,” says Buys. You may have a good idea for a business but in all the excitement of starting up, you don’t stop to ask if you will really be able to do it. You need passion and energy, but you also need the right skills and product knowledge if you are going to deliver a professional service or sell a quality product.

 The Growth Phase Stage Phenomenon

Growing businesses also often need better information management systems than start-ups, explains Nortier. “The systems have to grow with the business. It is easy to keep tabs on things when you are operating on a small scale, but you need to be able to get accurate information to act when necessary in order to succeed.”

Willie Nortier, COO of specialist investment company Business Partners, says that overtrading is the main reason for failure in growth companies i.e. they are growing faster than their capabilities allow them. While you shouldn’t try to suppress growth, be careful not to over-extend yourself and put the business under unnecessary pressure.

Cash flow management is crucial when growing. “You need to match your capitalization and growth in order to have enough working capital to fulfill your obligations,” explains Nortier. Business owners can come unstuck here, particularly if money is tied up in stock when cash is needed. The lesson here is to grow in line with your financial abilities.

Growing in a market that isn’t sustainable and putting all your eggs in one basket are also best avoided. Don’t gear up based on “expected” orders or for a single big project or client, and never tie yourself into fixed pricing. Tread carefully and make sure your growth strategy is sustainable and adaptable.

“If your success was based on your personal touch, be very careful to grow too fast,” warns Nortier. If expansion means that you stop interacting with customers, it could spell disaster.  Quality control is part of this personal touch, and putting the right systems in place is one solution to this problem.

Conclusions

To survive in these times of rapid change, entrepreneurs need to be open-minded and must not take everything for granted. Unlike a few decades ago, no business is too big to fail these days. One little unknown startup could have your business for lunch if you’re not prepared to adapt.

Among several others, Über is one example of a foreign disruptive idea/business that is changing the landscape of business across Africa – urban transport, in this case.

My advice: stay in the know about developments in your market and industry, both locally and globally. Seek out innovative ways and technologies to make your business run more efficiently; make your products and services more valuable; keep your employees committed and effective; and improve the satisfaction of your customers.

In today’s internet-obsessed world, it’s cheaper and easier to find the information you need. You just need to know where to look, and how to find it.

While there are many reasons for business failure, there are just as many strategies to counter problems before they arise. Ask plenty of questions during both the start-up and growth phase so that you can base your decisions on realistic data. And whatever you do, do it for the right reasons and with all your heart.

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