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ESTABLISHING SMALL AND MEDIUM SCALE ENTERPRISES: PROBLEMS AND PROSPECTS

September 10, 2011

ESTABLISHING SMALL AND MEDIUM SCALE ENTERPRISES: PROBLEMS AND PROSPECTS

TPL. DR. M.S JIMAH. Ph.D MNITP, RTP, FCE DIRECTOR, CENTRE FOR ENTREPRENEURSHIP DEVELOPMENT, AUCHI POLYTECHNIC, AUCHI, EDO STATE, NIGERIA.

BEING A PAPER PRESENTED AT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIAN (ICAN) ZONAL CONFERENCE HELD IN JALINGO, TARABA STATE

MARCH 8TH – 11TH , 2011.

ABSTRACT
The role of small and medium scale enterprises (SMEs) cannot be overemphasized given its relevance’s in resource mobilization, utilization and overall contribution to gross domestic product (GDP) of a nation. It serves as the engine of rapid economic growth and development as it respond to the macro economic problems militating against developing nations like Nigeria. Therefore, this paper examines the meaning of SMEs) factors to be considered in establishing SMEs, problems of SMEs, importance of SMEs to the Nigeria economy, government past and present efforts torwards SMEs problems associated with government efforts. The paper concluded that if policy implementation is enhanced through efficient monitoring and period review as well as provision of infrastructure, the SMEs, will be empowered which could serve then as an engine of growth to the Nigeria economy.

1.0 Introduction
The role of small and medium scale industries in developing countries, Nigeria in particular in progressively becoming significant. Significant in the sense that all available resources in any given situation in the economic well-being of a nation must be developed for industrialization and ultimately consumption through the small and medium scale businesses. Hence, the impact and potential contribution of small and medium scale business on a broad and diverse base as well as their accelerated effect in achieving macro economic objectives pertaining to full employment, income distribution and the development of local technology, makes the existence most inevitable. Therefore, the importance of small and medium scale industries in particular to the general economic development of any nation especially a developing one like Nigeria cannot be overemphasized. Hence, this paper titled establishing small and medium scale enterprises; problems and prospects cannot come at a better time.
2.0 Concept and Nature of SMEs
The definition of small scale industry varies with the culture and peculiar circumstances of the person attempting the definition. Studies on small scale enterprises identify more than fifty different definitions in seventy-five countries. The small scale business act passed by the united states congress in 1953 state that “A small business is one which is independently owned and operated and not dominant in it field of operation” (Amienghomwan, 2004). In greet Britain, the standard definition of small business is a business with an annual turnover of two million pounds sterling or less with a less than two hundred paid employees.
In Nigeria, the multiplicity of the definition is quite apparent. The Nigeria bank for commerce and industry (1990) defines a small-scale enterprise as one whose capital does not exceed N750,000 whereas the federal government in 1973 viewed small scale industries to include all trading and manufacturing units with a total capital investment up to N60,000 and paid employees up t o fifty persons (Ikharehon, 2002) the industrial research unit of the Obafemi Awolowo University defines small scale enterprise as one “whose total assets in equipment, plant and working capital are less than N250,000 and employing fewer than fifty, full-time workers (Banmbach 1992). While the Central Bank of Nigeria (CBN) operational guidelines in 1988 defined small scale enterprises with reference to two financial areas:- the merchant banks and commercial banks) it states, “for lending purpose of merchant banks a small scale enterprise is one with a minimum annual return of N500,000”. However, Osazee and Anao (1989) defined a small scale business as any business undertaken, owned, managed and controlled by not more than two entrepreneurs, has no more than twenty employees, has no definite organizational structure (i.e all employees report to the owners) and has a relatively small shares of its market.
In United States, the size of a business is measured using several criteria including the number of employees, total sales volume and total assets. Any business that employs more than one hundred people or grosses less than one million dollars is considered small in united states. Whereas in Nigeria, this could perfectly fit into medium scale business. This therefore makes it relatively difficult to attempt to define small scale enterprise differently from medium scale enterprise. The Nigeria minister for industry noted that “Enterprises employing under 500 workers are generally regarded world wide as SMEs”. Based on the structure of manufacturing in Nigeria, SMES are now defined on the basis of employment, In micro/cottage industries, 1-10 workers, small scale industries 11-100 works, medium scale industries 101-300 workers and large scale industries with 301 and above” (Jamodu 2000). In Japan, small business are described as “Ocusho Kigyo” which refers to small and medium firms that may secure capital up to one hundred million Japanese yen and less than 299 employees in manufacturing. In Indian, a small business involves a capital investment in plant and machinery not exceeding Rs 351khs. While in Indonesia the central Bureau of Statistics classified a unit employing 5-6 workers as a small scale enterprise. On the other hand, the Bank of Indonesia, defines small scale enterprise as having net worth in excess of twenty million rupees (Kesavan, 1995).
Based on the foregoing it is clear that there is no universally accepted definition of what constitute small and medium scale enterprise. What is most important therefore is the SMEs annexation of resources and overall contribution to the economic well being of developing nations across the globe.
3.0 Establishing Small And Medium Scale Enterprise In Nigeria
The following factors may make an individual decide to establish his/her own enterprise.
a. Job dissatisfaction: When an individual feels his skills, experience and other attributes are not being properly utilized, he/she may become dissatisfied with the job.
b. Lack of challenges
c. Pay dissatisfaction
d. Unemployment
e. The desire to be independent
f. Security
g. Encouragement by friends and government policies
Birley (1996) in his work titled “start up in small business and entrepreneurship cited in Izedomi (2006) outlined the following questions which are relevant for a business start up.
(i) How do I stand? The first thing to consider in starting a business is to have a desire to do so. This is a commitment that only on individual can decide on. One this decision is made, the next steps are to
• Know oneself
• Look for opportunities
• Consider available resource
• Plan to use these resource to take on the opportunities
(ii) What is the cost? The cost of starting a business will depend entirely on the needs. However, it is important to pay attention to following:
• Keeping cost as low as possible
• Doing most of the work, which is free to you
• Making available a detailed cost breakdown before executing a task.
(iii) When is the best time to start?
The best time for any business to start is now since there is no time like the present. This is because hesitation in business start up may lead to losing out.
Birely further outline a business start up plan using a flow chart as show below:

Business Start-Up Planning Chart

Source: Izadomi (2006)
(iv) Other requirements for business start up includes:
• Start a business with good people
• produce what customers actually want
• Minimize your expenses as much as possible
• Environmental factors
• Good road factors
• Electricity supply
• Closeness to the market and raw material (Izedomi 2006)
Most start ups that fail to do so because they fail at one of the above (curran and Blackburn, 1991). Therefore, a start-up that does all these will probably succeed.
Ikharehon (2002), is of the view that some people know exactly what business they want to start. Other need to search for a business that will be successful. The two basic research activities that have worked for several people are listed below:
(i) Read the following:
• Trade papers
• Business journals
(ii) Talk to the following people:
• Bankers,
• Accountants
• Business consultants
• Lawyers etc.
These professionals are able to help potential proprietors assess their ability. They may also know of individuals who have a business to sell.
• Business broker
• Industrial developers
• Chamber of commerce
• Friends, relatives and prospective customers
These individual are able to react to suggested needs that could be me by a potential business.
According to Baridam (1991) cited in Iregheh (2011), there are three ways by which a person can enter into business on his own, viz,
(a) He may decide to buy a business that is already established. If he adopts this option he must find out when the business was established, what is the profit of the business over the years, why the owners want to sell it amongst others.
(b) He may decide to start a new business. If he adopt this several option, he must determine the viability of the chosen venture.
(c) He may buy a franchise: if he adopt this option, he will need to obtain a patent or brand market license entitling him to a particular product or service under a trade frame or trade mark according to pre arranged terms and conditions.
Looking at the three ways of by which a person can launch his own business, two basic issues are critical to getting started viz. naming your business and estimating start up cost.

4.0 Naming Your Business
Selecting a name for your business is almost as important as the choice of business itself (Banmbach 1992). The name of a business must convey not only the type of business, but also imply the degree of formality and set the tone before a customer enters an establishment. In Nigeria, a business name must be registered with the corporate affairs commission (CAC). This requirement is for the protection of customer and creditor who have the legal right to know the identity of the owners. Your CAC certificates of incorporation offer you some protection from the abuse or duplication of your business name. If you were the first to use the name in your area, you could probably prevent others from using your name or at least collect royalties from them for the privilege of using the name.

5.0 Estimating Stand Up Cost
This is a major requirement for effective financing. It should usually be the starting point. However, there is no generic method for estimating start-up costs since some business can be started at zero kobo, other requires a few naira while others may requires considerable investment in inventory or equipment. To determine a start-up costs, all the business expenses must be identified. Some of these express will be one-time costs, such as the fee for incorporation and the building costs. Ongoing cost also includes the cost of utilities, inventory, and insurance e.t.c (Timnons 2001). These latter classes of costs also go for existing business.
While identifying these costs, it is necessary to decide whether they are essential or option. A realistic start-up budget should only include those elements that are necessary to start the business (Izedomi 2006). These essential expenses can then be divided into two separate categories. Fixed (overhead) expenses and variable (related to business sales) expenses.
Other questions the SMEs owner should address before commersement of business are,
- Personal factors: What personal qualities account for success in business:
Has enough experience been obtained in this particular types of business?
- Location: Where should the business be located? What factors should be considered in selecting a good location for the business
- Regulation: What laws and regulations ordinaly affect the business? Are any special permits or licenses necessary?
- Records: What kinds of records should be kept and how? Can the record keeping system be stanched? Who will keep these records and prepare the records?
- Buying? Who will supply the business with the needed items for operation? What goods or services are necessary, and in what qualities? When should they be purchased what favourable terms are available.
- Organization: Should the business be individually owned and operated or would be partnership or corporate be more advantageous?
- Layout: Where should the different items of mechanahise or equipment be located in the business? Should a news structure be built?
- Building: Can an existing plant or building be rented, bought or leased and then adopted for the business? Should a new structure be built?
- Personal: Where can qualified help be found? What training will the employees need? What benefits should be offered to encourage good workers to stay with the business? What other personnel problems might arise and how will they be resolved.
- Expansion: What must be done to expand the business? When would be the best time to expand?
Addressing each of these questions is a matter of foresight or indeed, more of planning.

6.0 Problems Of SMES
Ekezie (1995), enumerated SMEs problems in Nigeria to include: under capitalization, inadequate finance, ignorance of institutionalized incentives, high rate of business mortality, lack of trained personal, restricted market, lack to ownership dilution, poor accounting and recording keeping, diversion of business fund, poor infrastructural facilities and lack of appropriate technologies among others.
Akpokerere (2009), noted that small and medium scale business in Nigeria faces a lot of problems which make the realization of the benefits of SMEs difficult in the Nigeria economy. Bacdom (2004) and Iromaka (2006) stated that the most important problems of SMEs include the following:
a) Constrained Access to Money and Capital Market: Most SMEs are restricted to funds from family members and friends and are therefore unable to respond timely to unanticipated challenges. More worrisome is the SMEs inability to adequately tap available finance from the capital market. This has been attributed to their aversion to disclosure and ownership dilution.
b) Lack of Continuity: Most small-scale establishment are sole proprietorships and such establishments often cease to function as soon as the owner loses interest or dies. This raises the risk of financing such establishment.
c) Poor Management Expertise: Management has always been a problem in this sector as most entrepreneurs do not have the required management expertise to carry them through once the business starts growing. The situation gets compounded as training is not usually accorded priority in such establishments.
d) Inadequate Information Base: Small scale industries are usually characterized by poor records keeping and this usually starves them of necessary information required for planning and management purpose. This usually affects the project realization in this sector.
e) Poor Accounting System: The accounting system of most small scale industries lack standards and does not make room for the assessment of their performances. This creates opportunity for mismanagement, which subsequently may lead to enterprises failure.
f) Unstable Government Policy: Government’s policy instability has not been helpful to small scale industries. That has destabilized and indeed sent many small scale industries to early fold ups.
g) Restricted Market Access: Insufficient demand for the products of the SMEs also imposes constraint on their growth. Although many SMEs produce some inputs for the large enterprises, the non-standardization of their products, the problem of quality assurance as well as generally low purchasing power, arising from consumers’ dwindling real incomes, effectively restrict their markets. This is further compounded by the absence of knowledge about the existence of fringe markets by the SMEs.
h) Lack Of Raw Materials: In some SMEs, raw materials are source externally such enterprises are fixed to sourcing of exchange to get these needed raw materials foreign. The fluctuation of foreign exchange may therefore make it difficult to plan and that may precipate some stock and thing will destabilize the set up.
These problems can be categorized as finance, managerial/technical, commercial and infrastructure or must appropriately can be categorized as micro and macro problems. While the micro problems are those that are inherent in nature and operations of the SMEs, the macro those problems are those that are inherent in the economy thereby making the business environment difficult for the SMEs to strive or operate

7.0 Importance Of SMEs To The Nigeria Economy
In developing country like Nigeria, the importance of SMEs in the process of social economic development cannot be overlooked. The SMEs are very important to the economy in that large percentage of their production inputs are sourced locality thus, reducing the pressure on the limited foreign exchange earnings, helping to eliminate some of the deficit in the balance of payment.
Ikherehon (2002), enumerates the roles of SMEs as summarized bellows:
• SMEs constitutes the very basis of the national economy
• Developing of local technology
• Provide an effective means of stimulating indigenous entrepreneurship
• Mobilization and utilization of domestic savings
• Greater employment creation per unit of capital employment.
• Ensure the structural balance in terms of large and small industry sectors as well as rural urban areas.
• Ensure the supply of high quality parts and components and intermediate products thereby strengthening the international competitiveness of manufacturer’s goods.
• Stimulate technological development and innovations, produce specialized item in small quality to meet current and diverse demands
• Effective in subcontracting with large enterprises
• Increase efficiency by reducing cost and improving flexibility
• Capacity to expand export possibility and substitutes import effectively.
In addition to the above, Nwoye (1991) on the importance of SMEs, stressed that “it is now realized that the large scale enterprises have not played the dynamic role they are supposed to play in the rapid growth and development of the economy”. This role includes substantial contribution of the sector to the economic development of a nation in the form of improved GDP, employment generation, increasing local value added, technological development among others.
However, the importance of SMEs in the development of the country has been summarized in Nigeria third national development plan 1975-1980 as the generation of employment opportunities, stimulation of indigenous entrepreneurship, facilitation of effective mobilization of local resources including capital and skill as well as reduction in regional disparities (Rahanaty 2009).

8.0 Government’s past and present effort towards small and medium enterprise development in Nigeria
Over the years, the federal government has seen SMEs as the Cradle for industrialization and a prerequisite for rapid economic growth and self reliance. As a result, the government enunciated a number of policies and programmes/incentive that would create a conducive environment for the development and promoting of SMEs. The government for instance, enunciated a number of financial policies through national development plans and budgets as well as through its agencies to fund and provide necessary extension service to SMEs. Thus the government financial policy thrust is to ensure adequate financing of SMEs through loans or equity participation and to provide fiscal incentives designed to aid their growth and rapid development.
Among these policies/programmes are, the small industries credit committee (SCC) set up to administer to the country between 1975 and 1980. However, the performance of the small scale industries credit scheme was unfortunately rather poor in the sense that many unviable projects were funded( Ikharehon 2002).
- The federal government in 1973 established Nigerian bank for commerce and industry (NBCI) to provide financial services to small scale businesses. NBCI loans and equity investment in small business continued to be of immense help in the development of SMEs in the country (Anyanwu 1981).
- The national directorate of employment (NDE) was established in 1986 to promote the development of small scale enterprises. As a result of its activities in 1987, over 148,000 new jobs were directly created through the founding and setting of small scale enterprises (Philips 1981).
- The national economy recovery fund (VERFUND) was established to promote SMEs by providing medium to long term loans (5-10years) to those in Agro-Altied industries, industrial support services mining, quarrying, equipment leasing and other ancillary projects. The federal government provided N190 million while CBN contributed N100 million. African development bank contributed the remaining counterpart fund (Izedomi, 2011).
It should be mentioned that within the same period, other agencies such directorate of food, road, and rural infrastructure (DFRRI), better life for rural dwellers, peoples banks, community banks, new micro finance banks (MFB), working for yourself programme, the centre for management development were established to enhance the growth and development of SMEs.
The formation of small and medium scale industries apex unit within the central bank to assist in the disbursement of world bank $270 million loan to small scale entrepreneurs and the latest official concern by the federal governments towards encouraging the creation of small scale industries is encouraging. Therefore consoling the effects of poverty and unemployment, was the establishment of poverty alleviation program (PAP), youth empowerment scheme (YES), national economic empowerment and development strategy (NEEDS) at federal level, state economic empowerment and development strategy (SEEDS) at state level and local economic empowerment and development strategy (LEEDS) at local government level.

9.0 Problems Associated With Government Efforts Towards SMES
Although government made a substantial effort on the development of small scale industries, nevertheless, part of the huge SMEs problems could be traced to the government. This is mostly in the area of improper implementation of its policies towards SMEs and a serious neglect in the area of incentive and infrastructural development to facilitate business activities of SMEs.
Government policies seems to have constituted a serious problem area for SMEs. The beginning of harsh government policies toward SMEs can be traced back to 1982 with the introduction of “stabilization measures” which resulted in import controls and drastic budget cuts. These, in turn, adversely affected the subvention to the financial institutions established to provide financial assistance to the SMSs . For example, in 1983, out of a total of 8,380 applications for loans received from the SMSs for a total of 46.66 million naira was disbursed.(Alasan and Yakubu,2011).
As the economic situation deteriorated, the government introduced the Structural Adjustment Programme (SAP) in 1986. Since the strategy of liberalization and deregulation of interest rates was implemented, interest rates have continued to increase. The SMEs, which prior to the SAP had been granted concessionary rates of interest (particularly for agricultural and housing loans), have had great difficulties obtaining credit of a Stabilization Securities Account (SSA) whereby the banks were debited with liquidity in their accounts with the Central Bank.
The frequent changes, and sometimes conflicting government monetary policies, have also tended to hurt the SMEs. For example, while the government increased total credit allocation to SMSs from 16 to 20 per cent, the same government removed excess liquidity in the banking industry through increase in the minimum rediscount rate (MRR), transfer of government and parastatal accounts to the Central Bank and the creation of stabilization security Account (SSA) whereby the banks were debited with sicess liquidity in their accounts with central bank.
Another area is misappropriation of funds and wrong channeling,. Obi (1991) pointed out was that the plan to provide, modest loan to small scale business operations was a flop, because loans were granted in most cases on political rather than on commercial or project viability considerations. What was supposed to be revolving fund designed to benefit so many SMEs owners ended up as a bonanza for a few and it become virtually impossible to recover most of the loans.
Another factor is the government improper implementation of its policies. Its inability to recruit trained manpower and adequate equipment to aid the extension services, it put in place to support the SMEs. According to Obi (1991), the development centres were not endowed with adequate manpower to carry out technical appraisal of applications for loans from surging applicants.
In the same vain, Ireghah (2009), in an empirical study titled analysis of the impact of government policies on SMEs (entrepreneurial development) noted that government policy programs on SMEs are concentrated in the cities where there is strict competition between the SMEs products and large scale business. While rural areas where their activities will impact on the macro economy environment through provision of in employment rate, reduction in rural-urban migration and overall contribution to the GDP where neglected

10.0 Conclusion
Inspite of these identified enormous challenges confronting SMEs in Nigeria, they still continued to strive at their very best and their existence is the key to national economic development.
With evidence from countries like Indian, Indonesia, Malaysia etc where SMEs constitute more than 40% of the Gross Domestic product it is clear that SMEs in a developing country like Nigeria, if policies implementation is enhanced through efficient monitoring, periodic review and infrastructural facilities provided, the SMEs will be empowered thereby powering the engineer growth o the economy.

11.0 Recommendation
1. The entrepreneurs who are operators of these small and medium scale enterprises must ensure continuous accountability to ensure, survival, growth and development of their enterprises.
2. The entrepreneurs should ensure good conduct in carrying out their businesses as this will bring about truth, fairness, objectivity and integrity which in the long run will enhance goodwill that lead to growth and development.
3. Government should as a policy strategy institutionalize small and medium investors development scheme/centre to broaden the scope of entrepreneurial activites which will enhance productivity and strengthen their skills.
4. government should provide diversified, affordable and dependable financial services to the active poor, in a timely and competitive manner, that would enable small and medium scale investors to undertake and develop long-term sustainable entrepreneurial activities.
5. Government should be responsible for ensuring a stable macro-economic environment for small and medium scale investors by providing basic infrastructures (electricity, water, roads, telecommunications etc) political and social stability.
6. The ideas of the establishment of micro finance banks by the central bank of Nigeria may go a long way (only if it does not allow the usual path of such institutions before it). Therefore, small and medium scale investors should approach the macro-finance banks for such necessary funds for the establishment and growing of small businesses.
7. Financial institutions should be encouraged by means of incentives and policy guidelines to lend to small and medium scale investors. Although, every annual budget will always indicate monetary guidelines for granting loans to individual sectors with emphasis on small scale industries. However, this should be properly monitored to ensure strict compliance.
8. Government should ensure full implementation of its policies on SMEs programmes through monitory, continuous appraisal and upgrading
9. Government should also ensure that there is constant value for money audit on all its SMEs programmes

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