How the Dunning-Kruger effect is killing businesses in Rwanda

  

                             

In Rwanda as well as in most global south countries especially those on the African continent, the Dunning-Kruger effect is mostly found among entrepreneurs which leads most of them to close their business activities poorer than when they had started doing their businesses.

This phenomenon where people over-estimate their capabilities is mostly found in new and emerging entrepreneurs and it is what leads businesses into failure as the owners of the businesses make decisions that they were not supposed to be making due to lack of counsel and expertise in their field of operations. Companies and SMEs often face management issues caused by their managing directors who unilaterally takes decisions that are fatal to the businesses, this is due to that these companies are run like hood shops where the managing director is everything in the business.

     

It’s not surprising that in Rwanda to this date, you can find a company where the managing director does everything in the business, the books of account, the sales promotion, the production process, and the purchase of raw materials or goods used in the business …etc.  most of the companies and SMEs in Rwanda don’t fulfill the minimum standards of how a business should be run, a reason why most of them close usually after one to three years after registering.

The majority of businesses in Rwanda don’t at least have an accountant, and most of the entrepreneurs either estimate that the accountant isn’t necessary, or advances that they don’t have the means to hire a full-time accountant for their businesses. 

Most of the entrepreneurs running SMEs and emerging companies in Rwanda don’t see the importance of consulting business consultants, management consultants, economic consultants, etc. to advise them about different decisions that they want to make, which can affect their businesses in one way or another, and they qualify to pay for such kind of services as a total waste of money.  

This leads most of them to take loans to use for their investment activities ignorant of the total amount of money that they will pay back to the financial institution, they have little knowledge about how to manage the loan so that they can pay back the financial institution, with no accountants to follow up how the loan is being paid, and also with no consultation of the consultants with expertise in such matters they end up poorer than before.  

The financial and business literacy among entrepreneurs in Rwanda is at its low reason why such standards are not met causing them to fail. People get a two weeks training and they think that they know all that is to be known about doing business, they don’t take time to consult, or even to learn more about what they are doing and the setup standards that are to be met so that their business can flourish.

                                              

During a field visit by Economicspa to twenty businesses operating in the city of Kigali, fifteen that were run by Rwandan nationals, and five were run by Indian investors in Rwanda both categories falling into emerging companies or SMEs.  

Of the fifteen that were owned by Rwandan nationals only four businesses at least had an accountant and only one of them had reached out to a business consultant. However, of all the businesses that were owned by Indian investors, each of them had at least one accountant, two of them regularly reached out to business consultants and the remaining three had at least reached out once or twice to a business consultant.    

                             

Most of the owners of the group of fifteen that were run by Rwandan nationals didn’t really care about the opinion of a consultant about the matters concerning their business, while all the Indian shops in the city value the presence of an accountant mostly, and prone the necessity to consult business consultants before taking vital decisions concerning they businesses, especial when it comes to taking loans.

Of the group of fifteen that was run by the Rwandan Nationals, ten of them had their owner’s bank accounts the same as their business accounts, meaning that they don’t have separate accounts as in personal bank accounts and business bank accounts.  This doesn’t allow them to know what they have earned separately from their own income, they don’t realize that a business should be a separate entity from one’s personal life, especially when it comes to accounts. This affects them negatively as this kind of situation leads to the insolvency of the business towards its obligations, and most of the time bankruptcy as the owners of the business keep on serving themselves from the account for their personal consumption, most of the time with no control by consuming the business income as it reaches the account.

                                                  

As means of winding up, entrepreneurs shouldn’t fall for Dunning Kruger’s effect by overestimating their abilities and knowledge in their area of operations, as it leads to the failure, stuck or closure of their business no matter how experienced the entrepreneurs are.  Instead, they should try to full-fil at least the minimum standard of business management which is at least to have an accountant. And if they can’t financially afford the services of full-time business managers, economists, and others, they can at least manage to seek counsel from business consultants who can guide them throughout their business operations.  In the same way, Rwanda learns best practices from around the world, entrepreneurs in Rwanda should also learn good business practices from their counterparts coming from other countries.