How small businesses can build resilience to weather Covid-19

Kenyan SMEs experienced an average mortality rate of 75 percent within the first three years of inception (KNBS 2016), with the Covid-19 throwing a spanner in the works, most likely increasing the mortality rate to 75 percent by end of June, 2020, according to a statement by the Central Bank of Kenya Governor.

With all things held constant theoretically, all SMEs should be out of business by end of August. Isaac Newton’s first law of motion indicates that an object will continue to move at a constant velocity unless it encounters a force equal or above it to either arrest it or change its direction.

The rapid closure of SMEs and subsequent losses of jobs must be a matter of concern for policymakers as well as other entrepreneurial eco-system stakeholders. The situation however deserves herculean reaction in terms of support.

I have proposed appropriate SME interventions in my analysis of the 2020 budget policy statement by the national Treasury.

Despite the Government’s modest efforts of backstopping SMEs through a series of stimuli intervention such as establishment of a credit guarantee scheme, reduction of bank cash reserve ratio, tax breaks, gazetting items to be supplied by SMEs and Buy Kenya Build Kenya promotion by purchasing locally assembled vehicles among others, there is a high probability of not effectively addressing SMEs.

KNBS says 79 percent of SMEs are informal, meaning they will not enjoy the tax breaks or Sh35 billion availed to the banks credit guarantee scheme. Further, the current SME sector distribution is wholesale-retail, motor vehicle-cycle repair, food accommodation and transport, meaning the Buy Kenya Build Kenya initiative will not benefit SMEs.

Buy Kenya Build Kenya must be anchored on current SME manufactured products in current clusters of Kariobangi Light Industries, Kariokor Leather market, Uhuru textile market, Jogoo-Ngong Road furniture markets, of course with much needed support such as equipment upgrade, upskilling, standardisation and financing support.

The funding allocated to employ local youths through the Covid- 19 pandemic is commendable but is not sustainable. These funds should have been directed towards supporting SMEs which are already employing over 30 percent of the population as well as over 80 percent of new jobs. SMEs must be developed to grow hence employ more young Kenyans seeking employment.

Despite these shortcomings, SMEs must also take responsibility for their destiny within their resource constraints. SMEs will still face challenges of access to finance, access to markets, sub optimal policies as well as litmus test to their traditional business models.

SMEs have two powerful and related strategies they can use to build resilience during and after the Covid-19 pandemic.

The first strategy SMEs regardless of sector or size and cognizant of significantly low revenue combined with little to no working capital, changing market dynamics and cost management challenges; is business consolidation through mergers.

SMEs in the same sector can combine their businesses to help them overcome these challenges by riding on the synergy of the combined business. Synergy may manifest in the form of better quantity discounts on key inputs, reaching credit threshold for banks by combining collateral, cost savings, especially for fixed overheads and risk management due to shared cost on changing business model, among others.

The second strategy is eco system building that borrows from business consolidation but may not constitute a legal entity. An eco-system is a loose network of businesses either in the same sector or value chain that agree to work together on certain common issues. Example of such is a number of independently owned chemist or pharmacies in an estate that decide to combine efforts in purchasing inputs to enjoy quantity discounts but then each sells in their respective shop with varying profit margins.

Similarly SMEs in manufacturing clusters although competing can jointly market the cluster to bring more foot traffic or invest in ecommerce jointly and then compete for customers based on their uniqueness or competitive advantage.

Otieno is MD, Viffa Consult.