Sub-Saharan Africa is dominated by micro-entrepreneurs who struggle to grow their businesses; and these small firms are most likely to fail due to the high levels of uncertainty and risk in their local environments. This instability is brought about by many factors including political and economic instability, changes in global commodity prices and regulations.
The world bank lists the top five constraints in Africa’s business environment as practices of the informal sector, corruption, political instability, lack of electricity and lack of access to finance along with a lack of skilled labor and adequate training. The resources necessary to grow a business such as finance, human resources and social capital and infrastructure are less accessible in Africa
SMEs face a more difficult situation in raising money when compared to large firms. This is because many banks prefer to allocate their resources to large enterprises due to the lower risk of default and that they have clear financial statements, both of which SMEs lack leading to cash flow constraints.
Businesses in sub-Saharan Africa are, on average, up to 24% smaller than businesses in other parts of the world, as well as being far less productive and competitive. And even when small firms in Africa do manage to grow into larger enterprises, they do not see the gains in productivity we might all expect. The result is that there are relatively few large firms in Africa compared to other developing countries, though this trend is slowly changing.
There have been rapid changes in technology. The E-commerce market is expanding. This means that individuals prefer internet sales to over the counter sales. Most SMEs lack an online presence thus are unable to sufficiently utilize these opportunities. They lack their own websites to market their own goods. Making large profits does not matter if businesses are unable to effectively manage cash flow. SMEs also lack the adequate skills when it comes to financial management. They should avoid overdependence on one or two very large clients. They should take insurance against debt. These are some of the financial management skills needed.
The aforementioned conditions will cause real problems for Africa going forward if not well addressed and fast because the continent has one of the world’s youngest populations, and it is set to double by 2050, meaning the demand for stable wages and employment will rise drastically. To note is that most employment in Africa is characterized as vulnerable employment meaning that individuals are likely to be working in seasonal agriculture jobs and/ or running micro and small businesses (many of which are in the Agri-sector) which have no guaranteed high incomes or wage receipts. Although this type of employment provides an important source of income for many, it does not typically increase productivity and investment in local economies, nor spur the growth required to drastically increase prosperity.
It is at times like these that we’d typically look to entrepreneurs to create innovative, high growth businesses that will increase the demand and capacity for skilled labor, provide stable wages and employment and attract foreign investment. This makes it more important for Africa’s entrepreneurs to overcome the challenges presented by their current environment. Ensuring that finance is available to firms with the potential for growth should be one way to ensure that the above challenges are overcome. Another is to offer better education and skills training. Both these efforts should improve aspects of the local business environment and help to decrease the failure rate of start-ups.