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Survival Strategies for Small and Medium Enterprises in Nigeria for 2016

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Presentation given by Michael Faniran, Senior Manager, Accenture Nigeria at the Business Outlook for 2016 session at FATE Foundation on the 14th of January, 2016

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Survival Strategies for Small and Medium Enterprises in Nigeria for 2016

  1. 1. Survival Strategies for Small & Medium Enterprises January 2016
  2. 2. Copyright © 2016 Accenture All rights reserved. 2 Donald Rumsfeld Risk Classification 2 Known Unknowns 3 Unknown Unknowns 4 Known Known 1 5Key Responses Outline
  3. 3. 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 1 2 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
  4. 4. Known Knowns 01
  5. 5. Copyright © 2016 Accenture All rights reserved. 5 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
  6. 6. Copyright © 2016 Accenture All rights reserved. 6 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 Threats Scenario & Implications  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
  7. 7. 02Known Unknowns
  8. 8. Copyright © 2016 Accenture All rights reserved. 8 The Known Unknown Threats  Insurgencies/ Agitation Threats Scenario & Implications  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
  9. 9. Copyright © 2016 Accenture All rights reserved. 9 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 Threats Scenario & Implications  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)
  10. 10. 03Unknown Unknowns
  11. 11. Copyright © 2016 Accenture All rights reserved. 11 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 Threats Scenario & Implications  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
  12. 12. 04Key Responses
  13. 13. Copyright © 2016 Accenture All rights reserved. 13 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
  14. 14. Copyright © 2016 Accenture All rights reserved. 14 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
  15. 15. Copyright © 2016 Accenture. All rights reserved. 15 Questions

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