In Uganda and many other economies, SMEs form the backbone of commerce. Many of these businesses thrive informally, leveraging agility, minimal bureaucracy, and personal networks to grow. However, as they expand, they inevitably hit a ceiling—one where scaling requires external funding, partnerships, and long-term sustainability.
Recently, I had a conversation with a downtown business owner who shared his success story and why he had remained informal. He had built a highly profitable business, relying on family investments and a lean operational model. However, he had reached a point where family funding was no longer enough to fuel the next phase of growth. He sought my advice on attracting external financiers but was faced with a harsh reality:
No investor—whether a bank, angel investor, or venture capitalist—will invest in a business that lacks formal registration, structured financial records, clear governance, and contractual agreements with key stakeholders.
This conversation reinforced a critical truth: The perception that corporate governance is only for large corporations is a myth. SMEs, more than anyone, need proper governance to grow, attract funding, and ensure long-term sustainability.
The Challenges of Staying Informal
Many SME owners resist formalization due to the perceived high cost of compliance. They worry about taxes, licensing fees, and regulatory obligations, fearing that these costs will eat into their profits. While these concerns are valid, the long-term risks of remaining informal far outweigh the short-term savings.
Here are some common governance challenges SMEs face when they remain informal:
1. Limited Access to Capital
• Without proper financial records and legal standing, banks and investors cannot assess an SME’s risk profile.
• Lack of audited financials and governance structures make it difficult to secure loans or attract investors.
2. Over-Reliance on Personal Networks
• Many informal businesses thrive on family and friend investments, which are limited in scale.
• Once this capital source dries up, growth stalls, and expansion becomes nearly impossible.
3. Poor Financial Discipline
• Lack of structured bookkeeping makes it hard to track profitability, manage cash flow, or reinvest efficiently.
• Many business owners mix personal and business funds, leading to financial mismanagement.
4. Legal and Contractual Vulnerabilities
• Without formal contracts, SMEs risk disputes with suppliers, employees, and customers.
• Lack of regulatory compliance exposes them to sudden closures, fines, or operational disruptions.
5. Lack of Business Continuity
• Many SMEs collapse when the founder exits due to illness, retirement, or unforeseen circumstances.
• Without governance structures, no one is prepared to take over operations.
A Business at a Crossroads
The businessman I spoke to had built an impressive operation. His business was thriving, and he had developed a loyal customer base. But as he sought a capital injection to scale, he faced a harsh reality:
1. Investors wanted proof of profitability – He had no audited books.
2. Banks required collateral and structured business records – He had neither.
3. Potential partners asked for legal agreements – His business ran purely on verbal arrangements.
Despite his success, he found himself stuck. The same informality that had given him flexibility in the early days was now his biggest obstacle to growth. He had reached the natural limit of informal business success.
His story is not unique. Many SME owners find themselves in this position—successful but unable to take the next leap.
Breaking the Informality Trap: Steps to Governance for SMEs
Corporate governance does not mean unnecessary bureaucracy. It means putting systems in place that help a business operate efficiently, attract investors, and ensure long-term stability.
Here’s how SMEs can build governance without losing agility:
1. Formal Registration and Compliance
• Register the business to give it legal standing.
• Obtain necessary licenses and comply with tax obligations to avoid future legal risks.
2. Establish Proper Financial Records
• Open a business bank account separate from personal finances.
• Implement basic bookkeeping systems, even if using simple accounting software.
• Conduct periodic audits to create transparency and accountability.
3. Create a Governance Structure
• If possible, set up an advisory board or designate key decision-makers.
• Clearly define roles between owners, managers, and employees to avoid confusion.
4. Implement Legal Contracts
• Have written agreements with suppliers, employees, and investors.
• Protect business interests through proper documentation, reducing risks of disputes.
5. Develop a Succession Plan
• Document key business processes to ensure continuity in case of leadership change.
• Train a second-in-command to manage operations in the owner’s absence.
Conclusion: Governance is the Key to Scaling SMEs
Corporate governance is not a burden—it is a growth enabler. The businessman I met had done everything right in growing his enterprise informally, but to move to the next level, governance was non-negotiable.
SMEs that embrace governance early gain access to funding, reduce operational risks, and build businesses that outlive their founders. If the goal is to scale, compete, and sustain growth, then corporate governance is not just an option—it is a necessity.
Are you ready to take your SME to the next level? It starts with governance.