survival strategies for small and medium enterprises in nigeria for 2016

Survival Strategies for Small & Medium Enterprises

January 2016

Copyright © 2016 Accenture All rights reserved. 2

Donald Rumsfeld Risk Classification

2

Known Unknowns 3

Unknown Unknowns 4

Known Known

1

5Key Responses

Outline

In February 2002, Donald Rumsfeld, the then US Secretary of State for Defence, summarized the state of security using three “strong” terms….

These are things we know that we know

Threats we know will mostly likely occur and

can easily estimate their impact

Known Knowns

These are things that we now know we don't know

Threats we know exists but can’t easily estimate how they will play out or the extent of their impact

Known Unknowns

There are things we do not know we don't know.Threats we never anticipated or ever considered

Unknown Unknowns

3

12

Unknown Unknowns

Known Knowns

Known UnknownsThreats /

Assumptions

…This categorisation can likely be applied to illustrate the types of threats confronting SME development in Nigeria

3

Known Knowns

01


The Known Known Threats constitute Regulatory and Market driven threats - Regulatory Reforms

• Removal of fuel subsidy will be positive to the economy in the long run• However, short term impacts are limiting:

- Sharp rise in inflation- Higher operating costs particularly in energy and transportation

Removal of Fuel Subsidy

Threats Scenario & Implications

Increase in Tax Rates

Exclusionary Foreign Exchange Policies

Re-organisation of Government Agencies

• Possible increase in VAT from 5% to 10% and tightening of tax collection loopholes which may include imposition of higher fines for defaulting SMEs

• Higher operating costs

• Exclusion of purchase of forex from official windows to fund importation of common goods and household items eg. Textiles, poultry

• Import dependent SMEs would have to seek out alternative local options

• Change in leadership of federal parastatals as seen in FIRS, NPA and Customs• Stricter implementation of internal revenue generation polices e.g. higher

custom duties and demurrage, elimination of import waivers


The Known Known Threats constitute Regulatory and Market driven threats - Market Trends

• Limited access to finance will be driven by:- Complex application procedures - Unfavorable interest rates (much higher than those charged to large firms)- High collateral requirements

• Hinder individual business sustainability and overall economic growth Limited Access

to Capital/ Finance


Rise in Retail Culture

Declining Oil Prices

Wide Talent Gap

• More retail malls will be opened in 2016- over 10 new outlets scheduled for launch

• This will serve as shopping destinations for the middle class, which may reduce patronage of SMEs.

• Declining oil prices and the unwillingness of the CBN to devalue the Naira amidst constrained reserves continue to worsen the forex liquidity position of Nigerian banks

• Higher interest rate for SMEs

• Unavailability of a essential and required expertise in production, procurement, finances etc

• 90% of SME failures result from lack of experience and competence

02Known Unknowns


The Known Unknown Threats

Insurgencies/ Agitation


Ongoing Corruption War

SME Intervention funds by CBN

Digital Commerce

• Conscious and aggressive effort to recover misappropriated funds is creating tension in the polity

• Possibility of some Nigerian Banks to be indicted leading to general decline in liquidity

• Poor utilization rate (less than 30%) of the N220bn MSME Development Fund due to misalignment with government priorities and growing risk profile of the sector

• This further limits SME access to finance

• Explosion of e-commerce and online retailing with the emergence of fast rising online outlets like Jumia & Konga

• Driven by high smart phone data penetration (over 97 million users in 2016)• SMEs without web presence might witness significant revenue losses

• Security challenges in the Northern part of the country • Ongoing secessionist agitation for a breakaway Biafra republic from Nigeria• This has brought about series of protests in the eastern part of Nigeria• Increased business disruption as protest are likely to extend to other parts of

Nigeria.• Decline in investment inflows


The Known Unknown Threats

• Possibility of radical policy changes within the US following outcome of presidential elections.

• Aggressive focus on *STEM policies may exclude Nigeria from foreign aid in priority sectors like Agriculture and Solid Minerals

Outcome of US Elections


Transition to non-fixed collateral system-

Global Security Challenges

• 80% of assets of SMEs are moveable (e.g balance sheet) while 20% are immoveable hence transition to non-fixed collateral system is probable.

• Absence of advanced financial reporting capacity will lead to lower access to funding

• Global terrorism and migrant challenges may lead to stricter immigration policies targeted at developing countries

• Import of highly skilled technical workforce through exchange programs will be restricted or inaccessible

*STEM (Science, Technology, Engineering, Math)

03Unknown Unknowns


The Unknown Unknown Threats

• Global focus on sustainable development may require businesses to show evidence of sound sustainable/green practice as a requirement for receiving domestic or foreign loans

• Green technology has become a viable tool for reviving economic growth (e.g.China), however Nigeria lacks technical capacity in this space

Global Focus On Sustainable Development


Climate Change

Influx of Strong Foreign Competitors

• Extreme weather conditions can cause irreversible havoc to SME equipment, products and overall business stability

• PwC recently ranked Ibadan and Lagos amongst the “Top 10 Next Most Attractive African Cities for Investment”

• As Africa’s largest economy, Nigeria’s profile as a viable investment hub will continue to be on the rise

• Local SME players may be phased out

04Key Responses


Key Responses

Funding

Regulatory Compliance

• Expand your network to include HNIs• Be open to equity investments from friends and families; patience capital• Explore alternative channels of investment including crowd funding• Develop a good and bankable business plan• Strict cash management system

• Understand buyer values and define unique value propositions• Improve quality of your products to make them acceptable by large chains

like Shoprite and top e-commerce sites• Conduct customer satisfaction survey to gauge unique customer needs

Energy / Operating Cost

• Take full advantage of affordable mobile solar systems e.g. MTN’s SIM-enabled Mobile Electricity Solution to reduce energy costs

• Adopt shared services model - share back-office function professionals instead of hiring them

• Modify your production technology• Rent instead of buy or sublet some of your existing space.

Retail Culture

• Improve compliance with set laws and policies- prepare your books/operations for scrutiny, strengthen corporate governance, pay relevant tax.

• Leverage SME trade groups in lobbing• Strengthen competency in corporate governance, financial management,

financial reporting and compliance


Key Responses

FOREX Restrictions• Expand supply network to include more local partners• Play in the export space to earn FX-particularly agric produce,

textile and arts

Value Chain Focus

Technology / Digital

• Maintain an online and off line presence• Enlist products on reputable marketplaces – Jumia, Konga etc• Deepen digital/e-commerce reach in risky regions

• Be a niche player and specialize in specific segments of the value chain

• Be clear about your long term objectives

Management Capability

Competition

• Understand buyer values and define unique value propositions• Improve quality of services, innovation and sophistication of portfolio to sustain

competitiveness• Keep abreast of latest trends in your field of expertise• Build partnerships with foreign partners

• Understand the business model• Spend more time to find good talent and find ways to keep them – can include

making equity options• Partner with available skill development hubs offered by Deposit Money Banks;

Bank of Industry; CBN; NGOs• Engage SME consultants to build capacity and core skills• Leverage online training sources like Cosera for SME focused courses

survival strategies for small and medium enterprises in nigeria for 2016

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