Nearly 90% jobs are informal in Sub-Saharan Africa, according to the International Labor Organization. It is by far the highest proportion in the world. Many small African companies operate in a more or less informal way… How can we change the situation? How can we support these companies in their formalization?
For more than 10 years now, I have been working on a voluntary basis with the group Investisseurs & Partenaires, which is dedicated to financing and supporting small and medium-sized businesses in Sub-Saharan Africa. My background as an entrepreneur has led me to focus on an appropriate method for investing in the informal sector and supporting companies in their formalization.
For us, this is a key impact factor: the impact generated by an investment is directly proportional to the efficiency and performance achieved by the company. It provides greater added value, which increases self-financing capacity, makes it possible to support expenses such as health insurance, treatment of effluents or solid waste, investment in less polluting vehicles, etc.
The successes, difficulties and failures experienced over the years have enabled us to identify two main features:
- The manager’s skills should match with his/her project: a manager with a commercial profile, for example, will have difficulty deciding and monitoring technical investments; a high-level, visionary researcher may have difficulty convincing his collaborators to improve management processes…
- The formalization process, which is essential to improve the company’s performance, should not be underestimated. The changes are in everyday reflexes, in the implementation of precise measures at many levels… The work that this requires is always longer than expected.
What do we mean by “informality”?
The concept of informality can be simply defined: it is a mode of organization in which the transmission of information is not written. Let us quickly detail these two elements.
By ‘’information’’ we mean:
- All information involving an external factor (purchase contracts, sales contracts, rental leases…)
- The information necessary to ensure collaboration between employees in their respective functions: definition of functions, measurement of work results, measurement of their quality, etc.
- The information required by the entrepreneur to monitor the evolution of the company (the dashboard which provides monthly key operational or accounting data)
- The information necessary to establish reliable accounting: list of documents, data collected, and procedure for recording them (regardless of the medium)
By “written” information we mean: a precise form, verified, on an appropriate medium (whatever it may be), and with a method, and a frequency, known by the employees concerned. Conversely, the information that is not “written” is not precise, is not verifiable, can be misinterpreted, cannot be transmitted, and ultimately prevents any organization from making progress.
Historical perspective: the informal is only one step in the microeconomic evolution!
Until the 1960s, very few SMEs in France had really formalized their organizational structure. Job descriptions, quality controls, safety procedures and many other operating procedures were not written.
It was only in the 1970s that the need to specify the nature of the information, its transmission procedure, or its form, was essential to introduce computer processing of processes and data.
What are the consequences for investors?
The informal operation of a company means that the level of risk for the potential investor is much higher.
Indeed, because of this informal operation, the assessment of past performance remains unclear:
- At the operational level: how has the quality level evolved? What is the machine shutdown rate? What is the average overrun of the estimates? Service share?… etc.
- At the accounting level: the figures are not the result of stabilized procedures, and the best audits will not be able to reflect the reality of the past (average stock? average customer outstanding? historical costs per activity? etc.)
If the past figures are approximate, the business plan will present an additional risk (to the “normal” risk), which the investor must try to reduce.
How should the investor proceed?
Only a down-to-earth approach makes it possible to observe an informal organization. The investor will have gathered several indications that will drive its approach, defining the main priorities and next steps to anticipate:
Before the investment is made
There are two aspects that the investor must absolutely analyze when starting the investment process:
Corporate culture on the one hand: Formalizing the nature and flow of information in a company means changing habits… but a company’s culture cannot be decreed! The culture of a small or medium-sized company is, in fact, generated by the personal attitude and functioning of the entrepreneur. Thus, the ability of the entrepreneur is an essential aspect of a company’s culture, which the investor must be able to appreciate. We are talking here about the manager’s ability to translate into figures the projects, to monitor the results with precision, to define precisely the objectives assigned to the employees, his/her ability to be precise and rigorous…
The solidity of the economic model on the other hand: the impact investor must first and foremost target economic models whose earnings capacity has already been demonstrated. The construction of value added, and its transformation into EBITDA, can only be observed with the available data. Therefore, the development of a dashboard, for example, is greatly facilitated when the economic model is already known.
Investment & Implementation of an Action Plan
Observing how the company operates leads to the construction of an action plan, which will be discussed and validated with the manager and his/her team.
Some actions can be taken well before the investment date (examples: storage of stocks; registration of trade receivables; various quality measures, etc.). Others will require external technical assistance, which will be facilitated, or even partially financed, by the investor: this will be the “value creation” plan.
This plan generally includes various operational components, including one concerning the progressive implementation of reliable accounting procedures.
In all cases, a simple dashboard, including some key data, (operational and/or accounting) should be produced by the end of the first month after investment.
Follow-up of the company after the investment
The first few months are key to determine the success or failure of the changes introduced in the company (introduction of greater rigor, precision, and a culture of results.)
An informal management mode does not allow reliable monitoring for the investor.
I&P’s experience has shown that, whatever the number of teleconferences, meetings, verbal exchanges and Excel tables, the reality of a company’s evolution has often only been assessed in terms of the cash flow situation!
At the time of the investment, the investor and the manager must have two monitoring “tools”:
- The monthly dashboard, including 4 to 6 key, simple, and 100% reliable data.
- A value creation plan, the progressive implementation of which is assessed with predefined steps.
In addition, it is often vital to have planned in advance the intervention of external experts (especially in training teams in rigor and precision).
Key takeaways for the investor
Management of habit change
The rigor and precision in measuring the results of everyone’s work is often highly appreciated by employees. However, the effort to apply, every day, precise procedures must be the done through many exchanges and listening!
The benefits of this change must be felt positively and accepted by employees: the improvement of the quality rate of their work must be recognized; the achievement of specific objects must enable them to receive financial recognition, etc.
The entrepreneur has an exemplary role. It is important that his or her personal functioning is in line with the progress of precision, rigor, and timeliness. If this is not the case, it could lead to the failure of the value creation plan.
Monitoring of results
Margins is the key parameter to be monitored. The investment team must follow its files with a clearly established method and the tools mentioned above, which will allow it to be more efficient and save precious time:
- Monthly reading of the dashboard (the right dashboard is released within 3/5 days after the end of the month)
- Request for explanations on the data that attract his attention.
- In-depth discussions, in detail, on the corrective actions implemented.
Good monitoring should focus on important and urgent measures.
The most successful investments made by I&P over the years generally have two characteristics:
- A manager who listens, naturally valuing the need for precision in operation and accounting management, following an investor’s entry into his capital.
- A rather “’structuring” sector of activity, requiring a certain degree of precision because the company works with demanding professional clients or makes “general public” sales (pharmaceutical distribution, microfinance, technical installations, energy, IT services etc.)
Whatever the company, the sector of activity, or the investor’s attention to the above points, all scenarios possible! We can see, in the same sector of activity, one leader succeeding against all odds, and another, with all the required diplomas, failing… Humility and intuition remain the main values of any investor on this subject.
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Bruno Caire contributed to the report published by the group Investisseurs & Partenaires, entitled “Formalizing SMEs in Sub-Saharan Africa“. The report is a practical document gathering context analysis, investor and entrepreneur testimonies and key insights of I&P’s impact study.