April 6, 2018—There are both external and internal causes of failures among Uganda’s small and medium enterprises (SMEs), but neglect of keeping updated records remains a leading cause of concern.
“Many small scale enterprises do not maintain proper financial records and hence their owners may not even know whether profits are being made. There is often a lack of separation between the finances of the business and the personal finances of the owner which, combined with a poor savings culture, means that revenues which should be used to support the business are diverted to fund personal expenses,” Dr. Louis Kasekende, the Deputy Governor, Bank of Uganda said at the two-day Stanbic Enterprise Conference held during mid-week in Kampala.
He said external causes include the difficult business environment characterized by competition, high costs of doing business including costs of power and transport, unreliable labour as well as legal disputes such as ownership of land and property. On the other hand, internal causes include lack of business management and entrepreneurship skills.
He said even those SMEs which survive and can generate profits often fail to grow beyond a relatively small scale. Reasons include need for control by the owners, misallocation of profits and poor investment decisions.
Dr.Kasekende said, “The larger a business becomes, the greater the need for professional management dedicated full time to the business. Many owners however are reluctant to cede control over the day to day running of their business to professional managers. Secondly, the main source of funds for business expansion should be the retained profits of the enterprise.”
“However, profits are often taken out of the enterprise by the owner to fund personal and family expenses. Third, where profits are retained, they are sometimes re-invested in new start up enterprises rather than in the original enterprise in which they were earned. This prevents small scale enterprises from attaining economies of scale which would enable them to become more efficient and thereby improve their prospects of a viable future,” he said.
Kasekende said from a policy perspective, there is need to create regulations that will improve the business environment. In addition, the owners and managers of SMEs could benefit from practical help and training to strengthen their business and management skills.
“A number of organisations are currently providing technical assistance to SMEs in Uganda. Stanbic Bank already has an incubator that is up skilling these businesses. This will ensure they make a significant contribution to the economy, given the huge number of SMEs in the country,” he said.
From a financial sector perspective, all start-up businesses are considered high risk in terms of credit access. “The most appropriate form of capital for start-ups is equity capital rather than loan capital, mainly because loans have to be serviced irrespective of whether or not a business makes a profit,” he said.
He said, “To fund a start-up business mainly with loans is a recipe for trouble, as the business is likely to struggle to generate sufficient revenue in the early years of its operations. Banks can help SMEs by undertaking financial literacy programs and giving impartial advice on the adequacy and realism of their business plans.Banks should also look for innovative ways to reduce the transactions costs of lending to SMEs by utilising digital technology.”