Anticipating disruptions is key to business survival

Several institutions and groups have been investing much in the training and development of young Nigerian entrepreneurs, because we have realized that the future belongs to nations that provide the youth with the opportunity to use their talents to innovate and create. During the recent Global Entrepreneurship Week celebrated with seminars and discussions at the Pan Atlantic University’s Enterprise Development Centre (EDC), I was impressed with the evident enthusiasm of young people venturing into different economic fields, even in the present situation. Undoubtedly, these young entrepreneurs have their backs against the wall right now, having been pushed to it by the current recession occasioned by years of unbroken leadership disaster that Nigeria has suffered since independence. That these young people continue to trust in Nigeria as to continue to invest their time and talents in it is something we should all promote. It will be a patriotic national service to continue to support them in any way possible. This is what we have tried to do on the Small Business Handbook platform that has anchored this column all these years.

To have one’s back against the wall is to be pressed on all sides, boxed into a corner by an unfavourable situation, and to have no room to manoeuvre. In that condition, one either fights back or surrenders to the attacker. That is what has happened to many businesses in Nigeria in this economic brimstone now falling on all of us, especially following the unimaginable collapse of our national currency in the face of double digit inflation and stagnant incomes. Times like these get men’s backs against the wall, leaving them no space to push back. And indeed, that is what we are all doing right now – with our backs against the wall – both as businesses and individuals.

Anyone running any business here these days is most likely to have experienced amplified versions of what were ordinary business challenges, now in extraordinary forms. For instance, in the past, the challenge was that power supply was epileptic and we had to buy diesel. Now the power situation has worsened and there is no money to buy diesel. As if that is not bad enough, the price of diesel has moved from about 130 naira to about 200 naira per litre. This is in the face of massive job losses and evaporated purchasing power. The fact is that small businesses and even big ones are shutting down in their numbers. These were the only sources of any meaningful employment to our school leavers. Today’s graduates, who no longer apply for federal jobs because those are reserved for the children of privilege, are sentenced to a permanent holidays in their parent’s homes. Talents are being destroyed, crime is being incubated. Although there are several government initiatives to change this situation, the results are not visible. There is need to recheck the transmission channels and be sure no broken links exist.

In a recession, small challenges become magnified. The most visible business challenges that follow a recession include shrinking cash flows, declining demand for products and delayed payment for sales already made. These challenges have one sole objective – to box in these businesses and cause it to fail. In a recession, all forces that confront a business coalesce into one powerful force – the force of gravity, which – pulls in only one direction – south. What happens ultimately to the business depends on how it deals with such challenges. We intend to offer some guide here.

Small businesses typically have small capital bases and so the cash available is also very small. At the best of times, they operate tight cash flow regimes. As the limited cash flows into the business, so it is applied to transactions and it immediately flows out. Any disruption of this sequence of events throws the business into difficulties in good times and calamity in bad times. A recession is one of such situations that guarantee a disruption in the cash flow of most businesses, including big ones. Therefore, without much exception, businesses in Nigeria today are battling with cash flow disruptions. The resource flow in a business is a chain of events and the failure of any link rebounds on the entire system in a bandwagon fashion, such that a delayed payment by one customer transmits delay to many others. How do our small businesses handle cash flow disruptions?

Declining demand is another inevitable consequence of the present times. The general implication of a recession is that money seems to dry up. People cut expenditures and with it sales fall. Many small businesses have very few clients, some of which may be big companies. This exposes them to a great deal of risk. Many of the big companies in Nigeria are driven by government patronage, which at the best of times is unreliable. Such patronage has seen a lot of good times but today, things are different. As government struggles with dwindling revenues, it cuts expenditure on whatever services the big companies offer. This immediately translates to loss of demand to the small business, which depends on the big firms. How do our small businesses respond to this. Are they aware in the first place that demand is falling?

Even if the demand gets sustained, one way or the other, payment for sales would become the real victims as it either fails to come or at best comes late. Every business must be seeking alternative markets as the economy wriggles through this recession. It must be smart enough to know how the business of its principals are connected to the national economy and hence how it is impacted by the recession. Have our small businesses developed any strategies for handling sudden rise in aging maturities? Do they have capacity to handle workout situations and negotiate maturities?

Unintended extension of credit is another issue and connected to aging maturities. This occurs when businesses involuntarily grant credit to their customers or client. In fact, what the big corporations do at times like these, which of course is not illegal, is to ask for longer credit tenors from the small businesses that supply things to them. This award of longer term credit is often imposed on the small business and not discussed. In an environment of dwindling cash flow and failing payment dates, delay becomes routine and gradually turns to the norm. The small business will even feel good that the big client honoured it with a discussion of increasing the credit period. This simply means that the cash-strapped small business, which at best of times is battling with poor cash flow, is the one now financing the big corporation, just to retain part of their business. The impact of such action on small businesses could only be imagined.

There are worse situations faced by small business in this recession. One such situation crystallizes when the big patron corporation goes out of business entirely. It is not unusual for a small business to work exclusively for a particular big organization. It accumulates inventory almost exclusively for the big patron corporation. It may well be that the time of this inventory accumulation coincides with the time the big patron corporation balks under the weight of economic crisis like the present one. This means that both inventory and outstanding payment for supply already made are in jeopardy. The failure of such a corporation to take up the inventory spells doom for the small business, especially if the inventory is industry-specific. Our small businesses need to anticipate this kind of situation

The point being made here is that a recession is bad, no matter how one looks at it. It takes away one of the key antidotes to economic decline – business optimism – and replaces it with a major fuel for economic contraction – business pessimism. When entities are optimistic about the future, they invest more and take more risk. The reverse is the case when they see no prospect in tomorrow and a recession magnifies and projects such negative expectations. The minimum we need to do now is to whip up optimism. Much may have been in the works but evidence is scarce.

Emeka Osuji

Email: eosuji@pau.edu.ng. Tel: 08033066986