Business consulting can trigger the adoption of new business practices and investments. However, these might be abandoned if shown to be detrimental to and negatively affecting business income and profits, as in this case.
Manufacturing micro firms are offered a cash grant, a business consulting service or both. The consulting consists of 10 hours of support from an international consulting firm over the period of one year. The grant amounts to US$133, which doubles the capital available for investments for the average firm.
- To build business owners’ business knowledge
- To increase the adoption of good business practices
- To increase business income and profits
This intervention is tested on firms operating in an industry where one-person businesses are common but bigger firms with several employees also exist. As such, it’s an industry with many microenterprises but in which firm growth is possible and plausible.
Micro firms in the tailoring industry operating in an urban area that have five or fewer employees and apprentices. A third of the firms have no employees or apprentices and only 6 per cent have more than three.
On average, the micro firms are poorly managed: only 17 per cent keep written financial records, 7 per cent have not spent any money on marketing in the past year and 70 per cent of the shops look disorganised. Only a few (17.5 per cent) have ever accessed formal credit markets. Informal loans are also rare.
- One-on-one consulting: Over a year, firms receive an average of 10 hours of business consulting from a major international consulting provider. Each firm is visited at least once per month, with each visit lasting from 30 minutes to 1 hour.
The consulting is interactive, tailored to the firm needs and combines one-on-one training with collaborative work between the consultant and the owner to develop specific ideas for improving the business. The training combines rule-of-thumb lessons with more complex modules. It starts with a foundational lesson on record-keeping, which can be complemented by lessons on customer service, employee management, preparing cash flow statements and financial education. The consultants receive two days’ training on microenterprise coaching before engaging with the firms.
- Cash grant: Firms receive a non-repayable grant of approximately US$133, which is slightly more than the average cash, savings and on-hand money that participating businesses have. Firms are asked to spend the money on their business. The consultants work with business owners on developing a plan for spending it.
Firms are offered different combinations of support in the form of:
- Only one-on-one consulting
- Only the cash grant
- Both the one-on-one consulting and the cash grant
A fourth group doesn’t receive one-on-one consulting nor cash grant.
- A few months after the programme ended, firms that had received consulting support had slightly higher business knowledge and had implemented a higher percentage of standard business practices.
- The most widely adopted practice was record-keeping, with the percentage of firms implementing this practice increasing from 17 per cent to 62 per cent six months after the programme ended.
- These short-run effects disappeared two years after the programme, as firms reverted to their previous business practices.
- Two months after receiving the grant, firms had invested between US$60 and US$120 more than those that did not get the grant.
- However, one year later the investment levels of those who did and didn’t receive the grant were similar again.
- The programme only had small and non-persistent impacts on saving or borrowing behaviour.
- None of the support schemes had an effect on revenue, expenses, hours worked, number of employees or profits.
- If anything, firms that received support experienced temporary drops in revenue and profits at some point after adoption. The effect was more negative for those receiving the cash grant.
- This is consistent with a learning dynamic in which entrepreneurs experiment with new techniques and investments, learn that those aren’t profitable and abandon them.
- Relaxing capital and managerial constraints can allow business owners to experiment with new techniques or investments, but these experiments don’t necessarily lead to higher profits or firm growth.
- Adoption of better business practices might be profitable for some micro firms, but it’s difficult to identify in advance those that would benefit.