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Wednesday, 18 March 2015

SMALL BUSINESS MANAGEMENT-Past Questions and Answers (Continuation 2)



Question:
What in your opinion turns an investor on and off in any business venture?
Answer:
Below are what Turns Investor on
(1)   Evidence of Customer Acceptance – Investors like to know that a company’s new products have already being used.  Even if only on a trial or demonstration basis.
(2)   Appreciation of Investors Needs – Investors usually want to recoup their investment within three or seven years.  So they want to see some evidence that entrepreneurs have thought about how to make this possible.
(3)   Evidence of Focus – Investors want to feel that a company’s funders know which one or two things the firm does first and concentrate their efforts on them.  Investors know that company’s trying to do too many things won’t do any single thing well enough to allow for fast trade growth.
(4)   A Proprietary Position -  Exclusive rights to a product or process usually comes in the form of patents: they also may be obtained by copyright or trademark protection.  A company with such protection has an advantage over its competitors.
What Turns Investors Off
For danger sings stand out most to financiers:
(1)   A product Orientation – This refers to a situation where there is a single cause of excessive entrepreneurial optimism.  It is infatuation with the company’s product rather than with the market for it.  Business plans that devote more space t o describing the product than to detailing who will buy it and how it will be sold make investors suspect that the company is really just playpen in which the founders can fiddle with their latest toys.
(2)   Projections that Deviate Excessively from Industry Norms - each industry has a range of accepted financial results. If a company’s business plan projections that differ sharply from acceptable ranges in an industry, investors will worry that the entrepreneur has not done his or her home work or is being unduly optimistic.

(3)   Unrealistic growth projections – Entrepreneurs tend to have aggregated expectations of long-term growth.  Investors know that and expect it.  But when the projections begin losing touch with reality, all kinds of alarms go off in investor’s mind.  Unless the speculator projections are explained and argued convincingly in the business plan, investors are likely to be skeptical. 

(4)   Reliance on custom or applications work - When a company’s basic product needs to be altered or especially designed for each customer, potential investors see high costs and low profits.  Specially designed goods or services may be successful, but entrepreneurs forming companies of this type should expect resistance when they try to raise investor’s funds. 
Question:
Succinctly discuss the problems associated with small business operations in Nigeria.

Answer:
There are numerous problems which are the cause of small business failure.  Among them are the followings;

a.      Under Capitalization: - money matters are not matters of fancy.  Virtually, all business needs capital for its operations and growth.  But many of the small and medium scale business units are undercapitalized.  This problem of finance is in three dimensions;

o   The need for start-up capital, working capital and expansion capital.  Long-term capital is a particular need for small and medium concerns.  This capital is obtained by personal investment or by long term borrowing.

o   Borrowing large sum of money to be paid back over a period of years is difficult for small firms because of the limited access to capital market, borrowing from relatives or friends presents problems in that in those cases in which it is a possibility, the relative or friend often expects some voice in management of the business and there may be instances which this type of credit would jeopardize the relationship of both parties.  Accepting partners on the other hand, may involve surrender of absolute control over the business, which the small owner-manager may not be willing to do.

o   Commercial banks which were expected to launch – pad for the development of small and medium scale industries through the provisions of loans have failed to give adequate support to them.  Stiff collateral security demanded by banks often means small scale industrialists are unable to meet these provisions consequently losing the chance to obtain loans.  In addition, high interest rates charged on loans have scared off potential small and medium scale enterprises. 

Banks on their own part, have argued that they are discouraged to lend to this sub-sector since may potential and existing small and medium scale entrepreneurs draw up feasibility reports that are not viable, lack managerial skills and do not maintain adequate financial or accounting records about their businesses.   High percentage of default on repayment of loans are among the reasons that led to this sub-sector to be regarded as a high risk area for ending purposes. 

b.      Poor Business Accountability: The financial problem of small and medium scale enterprises is rarely only financial. Often, it is only a symptom, the diagnosis of which reveals other weaknesses.  Business finance and stock are mixed up with personal finance and stocks required for personal needs. Cash and stocks are taken at will for personal use whenever the need arises without accounting for such withdrawals.  This makes it difficult to assess the operating results of the business and at times starves the firms of its liquid resources.

c.       Poor Record Keeping: Some small and medium scale industrialists believe that the maintenance of book of accounts and other business records is costly and unnecessary. They feel they can defer the keeping of notes on important businesses transactions such as amounts due to be paid to suppliers and amounts due from customers.  Some people feel that keeping proper records of accounts is inviting trouble from the tax authorities while some others feel that keeping records will be a source of leakage of business secretes to others. It is not realized that keeping accounts help the business to present the information required by banks and other lending agencies to appraise and evaluate the credit worthiness and standing of the business as well as its ability and capacity for growth if financial assistance is provided. If for the purpose of avoiding tax, profits are manipulated and shown to be at the minimum, it may achieve the objective of tax saving of a small value, but would undermine credit worthiness since lenders go by study and analysis of the accounts of the business.  Also in the absence of production records and books of accounts, business efficiency cannot be ascertained.  The success of the business depends on proper planning.  Planning is possible only when data is available.  In fact, many small and medium scale business operators do not understand the intricacies of maintaining adequate business records or of preparing financial statements.  Financial data may be available but the manager may lack the necessary knowledge of appreciation of their value to interpret and use them effectively.

d.      Lack of Enterprise: This relates to lack of experience in the line of business which the small and medium scale business owners enter.  They may have experience in one line of business and not in another due to his unfamiliarity with the specific problems of the particular new line of business.

e.      Lack of Business Knowledge:  Knowledge consists of facts and theories that enable people to understand phenomena and to solve problems.  Various methods have been found useful in acquiring knowledge in the bid to solve problems.  These are habit, trail about error, authority, tradition, institutions, expert opinions, personal experience, education and induction, etc.  a small or medium scale business owner who has not acquired enough knowledge  about business may likely fail if he enters into it.

f.        Poor/Wrong Location:  Where a business is sited is called its location.  The factors which usually influence the location of business include; nearness to raw materials, market, source of power and access to supply of labour and transport facilities etc. Too often, a location is selected for some superficial reasons such as the availability of a building to rent or buy, closeness of the facility to one’s home etc.  these factors do not account for business success.  Good location is extremely important as a factor for business success.  Poor location has caused the downfall of many small and medium scale enterprises.  One mistake some people make is to rent a store in a location that has a history of failure.  They often feel they will be able to turn the situation around.  The small businessmen must analyze their unique situation before choosing the town and the actual site for the business.  Some of the checklist suggested include competition, traffic flow, transportation, packing facilities, unfavourable characteristics, and the availability of business services, among others.

g.      Inadequate Planning: Planning is defined as determining in advance what to do, how to do it, when to do it, who is to do it, and even why you should do it. It encompasses setting objectives as well as making day to day decisions on how these objectives can be achieved.  It involves the determination of both ends and means.  Therefore, planning a business begins with gathering and evaluating data on resources requirements, operation costs, potential markets and sales competition, supplier’s relevant government regulations etc.   unfortunately, however, many eager small and medium scale business owners push ahead impulsively, without paying attention to planning, and thus business failure.  One of the problems of small and medium scale business is the lack of strategic planning. It should be noted that sound planning precedes sound decision making.  Most small and medium scale businesses see planning as a luxury which could be afforded only by a large corporation.  Even when they plan, the tendency is that they concern themselves only with short term plan while they shy away from long term plan.   The lack of the use of modem method of gathering and analyzing data constitutes a weak point in the small or medium business strategic planning effort.

h.      Unplanned Expansion: Once a business becomes successful, there is a tendency to expand it in order to make it grow bigger.  However, there is a limit to which a small or medium scale business would grow beyond which it becomes unproductive or inefficient if appropriately planned expansion was not carried out.  Therefore, expanding rapidly sucks up sorely needed working capital.  It is therefore quite easy for a business to expand itself right out of business .  Too often, businesses that have a good chance of making it fail because of liquidity problems caused by unplanned and premature expansion.



i.        Inadequate Credit Control:  A common problem facing small or medium scale business owner is whether or not to extend credit.  Those firms that do grant credit must protect against the practice of extending too much credit.  But at times, some of them possess poor credit granting practices.  Credits extended to friends and relations are often times too hard to collect in times of need.  This therefore, increases the financial predicament of the small or medium scale business owner.

j.        Neglect and Time Pressure:  Since most small and medium scale business owners are usually managers, they must guard their business against personal neglect.  Common reasons for neglecting his business include bad habit, poor health, laziness, marital problems or apathy.  Others include devotion of too much to community activities or in Politics.  These tend to conflict with business profitability objectives.  However, some problems of business neglect is caused by time pressure.  The problem of time pressure is attributed to the fact that the owner manager is saddled with a lot of functions which he must perform within a short period of time otherwise he lives to reap the consequences of non-performance. This lack of time to managers is accentuated by participation in civic affairs and by time devoted to the family, hobbling and other recreational activities.  Time budgeting and reasonable restraint has been suggested as one way to overcome part of the total time pressure that confront the small and medium scale business entrepreneurs.

k.       Incompetence of Management: The major hazard of a small or medium scale business is the incompetence of management. A small and medium scale business owner may know all the management principles and theories, his management practice may jeopardize his business.  He may not possess the leadership qualities, be unwilling to delegate authority, lack appropriate human relations ability and may not possess the appropriate skills of management. Such a business operated by this small and medium scale business owner is likely to fail.  However, in a very small business, the entrepreneur is a one-man management team.  Top level decisions together with all the lesser tasks of management that the assistant cannot accomplish devolve on the entrepreneur.  Unfortunately, this requires a diversity of talents and no individual has superior ability in all areas of management.  Lack of management ability, on the part of the small or medium scale business manager has been one serious cause of failure.  Good management ability is a pre-requisite for success in both large and small business firms alike.  Concretely this means skill in handling men, money and inventory along with the ability to formulate wise policies, select proper methods, merchandize aggressively and create good relationships with employees, customers and the general public.

l.        Lack of Proper Inventory Control: Since the small or medium scale business manager is a generalist, he may lack an understanding of the importance of proper inventory control.  An inadequate inventory means that goods are unavailable for delivery to customers when they are demanded; or too large an inventory which creates problems such as the owner’s money being tied up or waste through spoilage and lack of proper stock of goods that are in high demand.  This may affect sales negatively and hence the income of the business.  Income for the business is generated by sales and without income the business collapses.

m.    Disaster:  There are certain circumstances over which the small or medium scale business owner may have little or no control.  Natural disaster such as thunder, flood, etc., or accident or sudden death of the owner may wipe out the small or medium scale business enterprise.

n.      High Rate of Loan Diversion and Defaults: Both Loans Obtained from government, banks and individual persons, are used to promote personal aggrandizement instead of the corporate objective of the business, and hence failure to repay the loan plus interest may lead to the failure of the business.

o.      Inadequacy of Infrastructural Facilities:  water, electricity, Accessible road, and other means of communication is a sine qua – non to the efficient performance of small and medium scale enterprises.  The absence or inadequacy affects negatively the efficient performance of small and medium scale businesses.

p.      Lack of Skilled Manpower: Owners of the small and medium scale enterprises are people of average means with no specialized skills or expertise.  Because of financial constraints, they are unable to hire the services of specialists on part time or full-time basis.  As a result efficiency and productivity are low and hence cannot survive stiff competition.

q.      Lack of Good Advice Cum Unwillingness to Accept Good Advice:  The small and medium scale business owner does not share his problems with others nor does he get advice in order to find solutions to his problems.  This results in high cost and/or unprofitable operations.  At times when he is given a good advice, he may not be willing to accept it.

r.       Poor Competitive Position:  A frequently alleged problem facing small and medium scale enterprises in Nigeria is intensity of competition from large companies.  Some small and medium scale companies are far greater innovators than large companies, but their innovation sooner or later face intense competition.  Reid and Hazel: Too often a small company pioneers a new product, a new process, does the research and planning, sweats through proving and the launch, does it all well on a modest scale.  Then the big boys move in, skirting parents if necessary and steamroll the small companies into obscurity.

s.       Poor Education and Lack of Required Skills; Poor education and lack of required skill was cited as another cause of business failure in Nigeria. Many small and medium scale industries in Nigeria are owned by proprietors who have neither adequate education nor the required skill to manage such enterprises. Consequently, the management of such businesses is on the basis of trial and error which ultimately leads to business failure.

t.        Lack of Preparedness: Another cause of failure is unpreparedness of small and medium scale business owners.  Some launch a new venture without adequate start-up capital.  Some people put their heads in a cloud and start businesses with less capital than they estimated.  This is a sheet lunacy.  It is far better to delay the start until you have saved or borrowed from friends.  Do anything, but get what you need before you start.

u.      Wrong Choice of Product or Services: Probably, one important variable affecting the survival and success of a small and medium business concern is the choice of product or service to be offered.

v.       Problem of not conducting feasibility studies: The difficulty in conducting cynical, market and financial analysis of projects before embarking upon them is another problem facing small and medium scale business owners.  The difficulty in undertaking product, process and market research is serious problem facing the small business man.  This difficulty arises principally from the demands for money and specialized talent necessary to conduct feasibility studies: The entrepreneur is seriously handicapped in these areas of demands.  It also takes the time and ability of someone to keep abreast of developments in methods, processes and products.  This difficulty in undertaking feasibility studies may make the advent and the usefulness of viable marketing formation remain long unknown to the small and medium industrialists. The problem of research is less true of big business because it has necessary capital and trained experts to undertake product and market research on a large scale.

w.     Government policies and regulations: Another problem facing small and medium scale enterprises in Nigeria is the effect of government policies and regulations, some of which bring distortions in the structures and management of these businesses.  Small enterprises will thrive if they are economically efficient without the plethora of government interventions.  Thus, the small and medium scale enterprises are not exempted from the vagaries of business control as experienced by other established business units.  They must operate in accordance with the federal, state and local government laws.  They must obey the monetary and fiscal policy measures some of which negatively affect their operations.

x.       Problems of management succession:  further still, the small and medium scale business entrepreneur has a unique problem in arranging for the management succession.  When a proprietor dies for example the heirs may reorganize the business and continue operations.   Some heirs may be untrained and unequal to the management task.  Even if the owner has sons and daughters, there would be difficulties.  These heirs could create a partnership but such partners would not necessary be either able or compatible.  A son might be disinterested in business, sell it in order to follow his own career interest and so waste the father’s effort. Such a son might be unequal to the job of running the business with the result that he runs it into bankruptcy.

y.       Problem of Acceptability of Nigerian Made-Goods: Another problem starring horribly into the faces of the small and medium business enterprises in our country today is the demoralizing effects of our peoples’ actions and reactions towards the locally made products.  Our small scale business do not produce goods of big quality and cheaper prices as those imported from the more technologically advanced countries.  This has resulted in unsatisfactory attitude of most Nigerians towards Nigerian goods (which they normally refer to as “Igbo made” “Nnewi proper” or “Aba made”) hence their preferences for foreign imported goods.  A host of other reason for the failure of small and medium scale enterprises abound. 


They include catastrophes and disasters, economic and government changes, geographic changes, industrial actions, death and domestic crisis, bad debt losses, shortage of key materials, fraud, loss of agency, machinery breakdown, lack of insurance for measurable risks, excessive fixed assets and many others.

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