An Introduction to The World of Small And Medium Enterprises in Nigeria

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Small and medium enterprises

Small and medium-sized enterprises (SMEs) constitute the foundation of the Nigerian economy. 

They are important in terms of the country’s employment creation, GDP contribution, and revenue generation. 

Really!!! What are you saying? What about the oil sector? Are they not the foundation of the Nigerian economy?

Of course, Nigeria has one of the largest economies in Sub-Saharan Africa. Though she is heavily reliant on oil, her economy is also supported by pockets of corporate organizations covering almost all spheres of activity within the country, ranging from multinational corporations with offices within the country to indigenous companies and, most notably, small and medium-sized enterprises (SMEs).

So, in this article, we’ll talk about how they’re classified, perceived, and distributed around the country. 

We’ll also look at their economic benefits, how they work in the Nigerian economy, and the legal procedures for them, and to sum it up, we’ll look at the reasons why some SMEs fail.

But first off, what are these small and medium enterprises we are talking about?

What are Small and Medium Enterprises?

Small and Medium Enterprises (SMEs) refer to businesses that have a relatively small workforce, revenue, and assets compared to larger corporations.

The criteria for defining an SME vary from country to country. In Nigeria, the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS) define SMEs based on their asset base, annual turnover, and workforce size.

Small and Medium Enterprises (SMEs), according to the Central Bank of Nigeria, are critical to the development of any economy because they have a high potential for job creation, the advancement of local technology, output diversification, the development of indigenous entrepreneurship, and forward integration with large-scale industries. 

This backed up our emphasis earlier on in the introduction that Small and medium enterprises in Nigeria are very important and critical to the overall growth of this nation. 

Examples of these Small and Medium Businesses in Nigeria include Adforumco, AdireWorld, Affordable Cars Limited, African Naturalistas, African Writers Hq, Agricentre e.t.c.

Classification of Micro, Small, and Medium Enterprises in Nigeria

In 2020, the Nigerian government revised the classification of Micro, Small, and Medium Enterprises (MSMEs) in the country. 

The new classification defines MSMEs based on the number of employees and annual turnover. 

The National Bureau of Statistics (NBS) updated the categorization of micro, small, and medium firms based on staff count and turnover in 2020. 

Micro-enterprises have less than ten workers and an annual revenue of fewer than ten million dollars. 

Small businesses have 10 to 49 workers and an annual revenue of $10 million to $100 million. 

Medium-sized businesses have 50 to 199 workers and an annual revenue of $100 million to $1 billion. 

According to this categorization, there are over 41 million SMEs in Nigeria, accounting for more than 80% of the country’s employment. 

The table below gives a summary of the classification of Micro, Small, and Medium Enterprises in Nigeria:

MICRO Less than 10 Less than 10 million
SMALL 10 to 49 10 million to 100 million
MEDIUM 50 to 199 100 to 1 billion

These facts also defend the fact that SMEs have a big economical influence on Nigeria.

They contribute to the GDP and aid in poverty alleviation by providing employment and producing money.

They also encourage entrepreneurship and innovation. Nevertheless, SMEs in Nigeria confront a number of obstacles, including a lack of access to funding, limited infrastructure, and a bad business climate. 

Despite their importance, SMEs in Nigeria need help with problems that might lead to failure. 

Lack of cash, bad management, and inadequate infrastructure are some of the causes of their failure. 

To guarantee the long-term viability of SMEs in Nigeria, the government and other stakeholders must foster an environment conducive to their growth and development.

SMEs are often viewed as the backbone of the Nigerian economy. They account for over 80% of the country’s workforce and contribute to about 50% of the GDP.

SMEs are prevalent in various sectors of the economy, including agriculture, manufacturing, and services.

Population and Statistics of Small and Medium Enterprises in Nigeria

According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), there are about 41.5 million SMEs in Nigeria, with over 90% of them classified as micro-enterprises. 

However, most of these businesses operate in the informal sector, making it challenging to obtain accurate statistics on their operations and contributions to the economy. 

But regardless, the following are the statistics of Small and Medium Enterprises in Nigeria, Sourced from the Nigerian Newspaper, Theguardian in an interview with the former statistician-General of the Federation, Dr. Simon Harry, and the Notable Statistical Board: Statistica.

A. According to Statista, In 2017, there were over 41 million micro-companies in Nigeria, accounting for more than 99 percent of the country’s micro—small and medium-sized enterprises (MSMEs).

Small and medium-sized businesses, on the other hand, were at 71,300 and 1,800, respectively. According to the source, the majority of these businesses were based in Lagos.

B. As of December 2020, at least 39,654,385 micro, small, and medium companies (MSMEs) operating in Nigeria, compared to 41,543,028 million in 2017, a 4.5 percent reduction.

This is mentioned in a report jointly issued on January 12, 2022, in Abuja by the Small and Medium Businesses Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS).

C. A breakdown of the numbers revealed that micro-businesses (MEs) accounted for 38,413,420 million, while small and medium firms (SMEs) accounted for 1,240,965 million, representing 3.1 percent of the total.

D. MSMEs in Nigeria provided 46.31 percent of the country’s GDP and accounted for 96.7 percent of enterprises, according to the research. Similarly, the survey found that MSMEs accounted for 6.21 percent of gross exports during the fiscal year under review.

E. Men controlled 67.1 percent of the MEs, despite the fact that the COVID-19 epidemic afflicted MSMEs in the country, with 53.2 percent of SMEs and 37.3 percent of MEs temporarily shuttered due to lockdown.

F. Manufacturing, wholesale and retail commerce, lodging and food service operations, mining and quarrying, building, water supply, sewage, waste management, and cleanup were all addressed in this study survey. Human health, social work, and professional, scientific, and technical work are further examples.

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Small and Medium Scale Enterprises versus Entrepreneurship

The terms SMEs and entrepreneurship are frequently used interchangeably. There is, however, a considerable difference between them.

While entrepreneurship entails starting new enterprises and taking risks, SMEs are pre-existing businesses that are still in operation and contributing to the economy. 

Entrepreneurship, on the other hand, is a critical driver of SMEs’ growth and development.

Entrepreneurship refers to the creative, inventive, risk-taking, and organizational processes and functions of individuals who start, operate, and nurture a company enterprise.

It entails finding opportunities, developing or upgrading new or current technology, goods, or services, accepting the associated risk, and reaping the resulting gains.

Entrepreneurship is a process that results in the formation of SMEs, whereas SMEs are simply enterprises or business ventures run by individuals or Owner-managers as they are commonly known. 

Entrepreneurs, in terms of purpose, find, invent, and build enterprises.To be entrepreneurial, a company must use novel management concepts and approaches. 

In addition, goods are created and standardized, and processes and tools are created based on a comprehensive study of the task to be done. 

Setting essential standards and controls, as well as developing new wants, a market, and consumers, are all part of the process. 

Consequently, while an entrepreneur may begin as a small and medium firm, he may not stay in that category for long, and not all small and medium enterprise owners are entrepreneurs.

Although entrepreneurs and small company owners are also self-employed, their habits differ.

Entrepreneurs frequently desire to modify and improve things. They like to create energy rather than remain content with their existing state.

Small business owners, on the other hand, are satisfied as long as they are profitable. They will only ever strive to do so much.

Entrepreneurs frequently have the goal of bettering the world. As a result, their firms will have a large influence on many individuals.

Microsoft, for example, serves practically everyone on the planet. As a result, they enjoy a substantial market share.

Small company owners have a modest market share since they service people in their immediate vicinity. They prioritize their communities and their needs.

This results in a disparity in the market shares of entrepreneurs and small firms.

Read also: 5 Essential tips to become a successful entrepreneur in Nigeria. 

Legal Procedure for Formation of SMEs in Nigeria

To establish an SME in Nigeria, legal requirements such as registering with the Corporate Affairs Commission (CAC) must be followed and the likes, the following steps gives a summary of how the procedure should go;

  1. Business name registration

This involves registering the business name with the Corporate Affairs Commission (CAC) to ensure that the business operates legally and is recognized by the government. Here is how to go about it: 

  • Check for the availability of the Company name and reserve a new name. 
  • Fill out the CAC-BNo1 pre-registration form and attach the necessary registration documents.
  • Pay the filing fee – Registration is now complete on the COMPANY REGISTRATION PORTAL (CRP), complete with an electronic Certificate of Registration and a Certified Extract of registration information.
  1. Obtain necessary permits and licenses

Depending on the nature of the business, SMEs may need to obtain specific permits and licenses from relevant government agencies to operate legally.

Common permits include the NAFDAC permit (For SMEs related to processed food, drug, drug product, cosmetics, medical devices, or water), CBN Fintech License (Financial Technology Services (Fintech companies)), NUPRC (DPR) Oil and Gas Service permit and others.

  1. Tax registration

SMEs must register with the Federal Inland Revenue Service (FIRS) and obtain a Tax Identification Number (TIN) to comply with tax laws in Nigeria. 

Although, upon the registration of your business with CAC, you should be granted a Tax Identification Number (TIN).

  1. Obtain necessary certifications

SMEs may need to obtain specific certifications and accreditations to operate in certain industries.

For example, businesses involved in food processing and packaging must obtain certification from the National Agency for Food and Drug Administration and Control (NAFDAC).

Benefits of Working in Small and Medium Enterprises in Nigeria

While many graduates aspire to work for huge corporations, you may be able to obtain a more meaningful and fascinating work life by finding employment in one of the numerous SMEs.

Although you may not be able to impress your friends and family by working for a well-known corporation, the benefits you may receive in return may be well worth your time and attention.

Here are some of the advantages of working for a small business:

  1. Greater prospects for advancement in your career

The term “responsibility” refers to the act of determining whether or not a person is responsible for his or her own actions.

Because these organizations have such tiny teams, your chances of rising up the ranks and being promoted are significantly greater than if you started at the bottom of a company that employs thousands of people.

  1. Opportunity to express one’s ideas

If you’re a creative person who is always coming up with new ideas, you could discover that your originality is hampered at a huge firm where everything must go through a long, tortuous approval procedure.

  1. Avenue to broaden your capabilities

Unlike bigger organizations, where departments may live in bubbles with little inter-departmental contact and where departments can exist in bubbles with little interdepartmental communication, everything functions on an open basis with smaller firms.

Working for startups or small businesses with a few workers is likely to be a case of an ‘all hands on deck,’ where everyone works together to complete tasks.

  1. A flexible and casual environment

SMEs are often far more comfortable places to work.

In terms of elements like vacations, dress regulations, and working patterns, they typically have more relaxed rules.

Hence, if you thrive on having more freedom and flexibility to combine your professional and personal life, working at an SME may be the appropriate fit for you.

  1. Collaborate closely with management and other leaders

Managers and executives with years of expertise in an industry may teach new recruits a lot.

 Nevertheless, when you work in a huge corporation, it might be difficult to gain access to their information.

Reasons for Failure of Micro, Small and Medium Enterprises in Nigeria

Despite the significant contributions of SMEs to the Nigerian economy, many SMEs fail within the first few years of operation.

Some of the reasons for their failure include inadequate funding, poor management, lack of access to market information, weak infrastructure, and inconsistent government policies. 

CBN says, “The key issues affecting the SMEs in the country can be grouped into four, namely: unfriendly business environment, poor funding, low managerial skills and lack of access to modern technology.”

The following are the reasons why SMEs fail in Nigeria;

  1. Copying other enterprises

Any small firm will fail if it constantly duplicates what other businesses are doing. 

A company must be unique and should not make critical business decisions or choices just because others have done so.

  1. Inadequate customer service/support

Customers that are not treated or appreciated grow unsatisfied, submit negative evaluations, and patronize others. 

Small firms that do not provide excellent customer service will perish as a result of the loss of many clients and prospects.

  1. Financial mismanagement

Several small businesses collapsed because the founders squandered the company’s cash and did not hold themselves accountable. 

These companies fail to account for their sales or how they spend their money.

  1. Inability to handle growth-related changes

Some tiny enterprises expand at an exponential rate in a short period of time. This expansion frequently brings with it new obstacles for these small firms. Changes in funding, billing, resource usage, and technology are among the concerns.

  1. Inadequate market demand

Many Nigerian startups and small businesses fail due to a lack of market need/demand for their products or services. 

This is why it is critical for every firm to focus on certain products or services that are in demand and have an existing market.

Read also: Everything You Need to know about market segmentation as an Entrepreneur. 

  1. Insufficient funding

Insufficient finance or a lack of cash is another important cause for the failure of many small enterprises in Nigeria. 

Many entrepreneurs make the typical error of establishing a firm with insufficient operational money.

  1. Ineffective business management

When a company is poorly managed, it will die. Planning, organizing, staffing, directing, motivating, managing, co-coordinating, and communicating are all examples of management activities.

In Summary

SMEs are critical drivers of economic growth and development in Nigeria. They create employment opportunities, promote local entrepreneurship, and enhance the production of goods and services. 

However, SMEs face several challenges, including inadequate funding, poor infrastructure, and lack of access to market information. 

And in this article, we have looked at their economic benefits, how they operate in the Nigerian economy and the legal requirements for forming them.

Finally, we looked at why some SMEs fail, and this concludes the introductory guide about Small and Medium Enterprises in Nigeria.

Was this useful to you? Let’s know your thoughts in the comment section.

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Author: Precious Fawole

Edited by Emmanuel Odebiyi

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