Studies show that majority of small-scale enterprises do not survive beyond five years. SIMON EJEMBI writes on the reasons for this.
The country’s harsh economic environment has been cited by a number of people as the reason why their small businesses failed. They complain of poor access to funds, high taxes or ‘multiple taxation’ and high operational costs. Studies have shown that all these are factors that affect the success of such businesses. Several of them, however, indicate that poor business plans as well as management play a major role in the failure of such businesses.
Some of the major reasons cited by experts and studies are:
Poor planning
A business plan goes beyond just stating what the business is about, its target market and growth objectives. It is meant to help the owner stay focus and provide information about operational costs among other things. It is also meant to be a sort of step by step guide to help the entrepreneur achieve his or her goals. But many small business owners take it for granted, and fail to make it as detailed and professional as possible. This causes them to make a lot of mistakes, which can cause the failure of the business. According to experts, once the business plan, which can be likened to the foundation of the business is poor. The possibility of the business collapsing is much higher. No matter how good a business plan is, it needs to be reviewed at intervals, be it yearly or monthly.
Cash flow problems
Experts say another reason why small businesses fail is as a result of inadequate funds. They explain that many entrepreneurs fail to realise how much cash they need to establish and run a business, while some of those who know what is required go ahead to establish the business with the believe that they would get access to more funds eventually and stablise the business. This often leaves them with difficulties in running the business, eventually forcing them to go into debt in order to keep the business running.
Obsessing about rapid growth
Another reason cited by experts is that several small business owners are obsessed about growing their business. They want to start as big as possible and to grow as quickly as possible. While it is possible to grow quickly and fast, experts say those who obsess about it make the mistake of starting the business on a scale that is bigger than they can afford or manage. Instead of building cash reserves and taking time to carefully plan their expansion, they rush into it, using up all the funds at their disposal to expand. When the business hits a rough patch, they find themselves incapable of surviving it. It is not wise to use up the entire capital before the business starts generating revenue.
Poor financial control
This is a major reason for small business failure, according to experts. The say many business owners do not know how to manage their costs or utilise the funds at their disposal. With many of them failing to employ accountants due to their size, they often end up with bad business models. Rather than focus on saving and minimising costs, they spend more believing that the more they spend, the better their business will be.
For example, some people use all the cash at their disposal to set up a business, leaving nothing for the payment of salaries. Such people often find themselves needing to borrow money to pay unhappy employees. And when they business fails to make the required profits, things go from bad to worse. Not only do they have to pay workers, they also have debts to service. Experts say the right thing to do is to ensure that there the required funds have been sourced before starting the business; get enough funds to keep the business running for say six months to one year.
Inexperience
Inexperience on the part of many of the owners of small businesses is another reason why such businesses fail. Some studies show that many small business owners lack an understanding of how their businesses are meant to operate. They are incapable of putting needed processes and checks in place and this can lead to failure.
Also, some of these people cite their businesses in unsuitable locations because they are more concerned about how cheap it is to cite a business there, rather than whether it is appropriate. In addition to this, many of them do not employ the appropriate people. They also do not know how to engage or motivate their employees.
Poor record keeping
This is a big problem for small business. With many of them being run as family businesses, keeping records is not top priority, neither is professionally done. But for an entrepreneur to protect his business and properly manage his finances, not only is it important to properly document and store the company’s financial records, it is important to review them regularly. Some businesses have failed because they defaulted in their tax payments, only to find out years later that it has run into millions of naira. So, it is important to pay taxes and meet other regulatory requirements.
Stiff competition
The nature of competition that a business faces can determine whether it succeeds or fails. With strong competition, coupled with some of the above reasons, customers may opt to patronise another firm. Over time, as they grow, many small businesses in their quest to get new or more customers start neglecting the older ones. They fail to realise that older customers are virtually more important than new ones. While it is okay to seek more customers, it should amount to letting go of what is already in the grasp and reaching out to something else.
Failure to accept change
It is quite common to see small businesses that once enjoyed high patronage, struggling to get customers or clients. Experts say this mostly happens when the business fails to adapt to new trends or change. For instance, many people are now comfortable using Point of Sale terminals to pay for goods and services. As much as such people may like a particular business, if that business does not follow the trend, they may opt for one that has.
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