SMEs: Staying Afloat During Turbulent Times

Published on 20th May 2014

“Kenya is a risky place” has become the anecdotal headline that should worry most business owners. The stories recently grabbing the headlines include; Al Shaabab, the return of past corruption ghosts, devolution sabotage, illegal contracts, travel advisories, impeachments and insecurity, among others.  SMEs tend to be victims of a cascade failure; suffering from the ‘ripple effects’ of many of these crises.

The first half of 2014 has been characterized by a poor show of performance for most SMEs in most sectors; mainly the non-consumer facing sectors. This is attributable to the recent wave of insecurity that is being blamed on Al-Shaabab.This trend is set to go on at least for the medium term unless it is addressed. In the medium term, the situation is expected to get worse as the effects of Anglo-leasing payouts are felt. In addition, the huge infrastructure spending which will result in additional government borrowing is set to make the situation worse. Further, the poor performance of some key sectors like tourism will have a bottom line effect on business spending. A recent travel advisory by both the US and UK saw a wave of tourists leave the country amid fears of possible terror attacks, a sign that the current operating environment is not sound.

Small and medium enterprises must carry out a critical analysis of the sector that they are operating in, the likely scenarios that are likely to play out and devising some strategic realignment to ensure survival post a potential crunch.  Notably, interest rates are set to remain erratic begging the question over; whether it is timely to take bank credit or pursue other financing options.  Further, the likely effects of a possible slowdown in consumption should be assessed critically to ascertain off-take gaps and their impact on the bottom line.

I have interacted with over 20 small and medium enterprises from different sectors. Despite a very grim picture of the current business environment, numbers released by the government points towards an impressive performance. Inflation, for example, the government states, “driven by supply of basic foodstuffs and stable domestic prices of petroleum products declined from 9.4 percent to 5.7 percent.” Further, “The Central Bank revised its CBR from 11.0 to 8.5 percent which in effect led to a slight adjustment of lending rates by most banks.” Lending rates however remain on the 22-25 percent levels.  The current mismatch in numbers is set to keep doubts high for a period of time.

SMEs must find a way to strike a balance between crisis management and strategic planning. Notably, some of the best opportunities in life are presented during crisis situations; eg. improved rail transport, safer air travel, better healthcare, etc. Whereas crisis management deals with any major unpredictable event threatening to harm the organization, its stakeholders or the general public, strategic planning is concerned with the mid-term future of the organization, enhancing its success by dealing with weaknesses and threats as well as strengths and opportunities that present themselves to the organization.

However, SMEs are less likely to undertake both the above than larger organizations and even when they do, it is with lesser discipline. A recent visitor for example has been running a successful tour firm for the past 10 years.  He has in the past four months had all his scheduled clients from Europe and US cancel their trips to Mombasa amid insecurity concerns. During those four months, he has not paid his workforce of 12 employees.  Until May 2014, his employees had lived on hope that ‘a silver lining’ was in sight. The twin bombings in Mombasa and Nairobi during the same month (May) served the last blow to his business during which he decided to send home all his employees and procure his vans to a different business. Which business? He is not sure, and just like many other SMEs, not comfortable paying for professional consultancy services.

An IT firm, having operated for a solid 12 years too decided to throw in the towel with employees’ arrears running to millions of shillings since December 2013.  Three years ago, the same company turned down a proposal to restructure and divest amid growing competition from other players and new innovations like Whatsapp which rendered bulk sms service unattractive.

What can SMEs do at this time of uncertainty? To be resilient, SMEs need to navigate a set of apparent contradictions that juxtapose effective planning with adaptability to changing circumstances.

First, they must inspire their employees by giving them hope and direction while being grounded in the situation they are in. Although it was six months for the IT firm on slow business, constant hope and direction kept the employees in business. Letting go of the business however at the time could have been avoided had the entrepreneur taken advise from third parties who were open to offering invaluable strategies to balance strategy and crisis before it happened.

Second, SMEs should encourage an organizational culture that values disciplined planning while fostering innovation. A client in the hospitality business did not see the need to hire skilled personnel purely because she believed that her employees were at best required to serve their walk-in clients, get their pay at the end of the day and wait for the following day’s routine. When competition checked in, employees could not think beyond their specialty menu and sales dropped considerably forcing her to look for an alternative location for the business. A sure bet is that the new location will undergo a similar curve, shut down upon the introduction of new entrants.

Third, entrepreneurs must plan and make decisions carefully, be structured effectively, be responsive and bold. A client, a farmer supplying to hotels in the city has had to content with unpaid invoices for over a year. The same farmer has not been able to figure out a way of getting his produce to other suppliers who pay in cash or take action against the non-paying buyers.

Finally, entrepreneurs must have teams able to recognize patterns and integrate information to make sense of a chaotic situation, yet be alert to subtle changes as the situation evolves. The current situation is a perfect example to this. If you are in tourism, the question should be what happens if the security situation does not improve. For the entrepreneur in agriculture, what happens if the hotels pay badly, or the retail outlets don’t buy a lot of the produce? Value addition? Export? A client in trading business has to content with constant employee theft purely because he does not want to invest in technology to control theft.

There is absolutely no single coherent set of processes that can help an SME during possible or at times crisis through surviving the situation while finding the silver lining. However, some key enablers like leadership, culture, decision making and situation awareness can greatly help. Lack of planning evidently undermines an SME’s ability to survive such.

By Michael Musau

The author [email protected] is Consultant, Corporate Finance.


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