Why do small businesses fail? This is a question that tends to come up almost daily in entrepreneurship forums. It is actually one of the most discussed questions in entrepreneurship forums. And it is not hard to see where the interest in this question comes from. Don’t we keep on hearing grim statics on small business failure rates – where we are told that up to 95 percent of new small businesses don’t live to see their fifth birthday? Given those figures, isn’t it only rational for people who are launching or running small businesses to want to know why others before them have failed (in order to avoid the same fate)? That then, is the background against which the discussions on the leading causes of small business failure are held. And in this article, we seek to add our input to that debate: by highlighting what – according to our research and experience – are the leading causes of small business failure. Those include:
1. Lack of adequate capital
For a small business to succeed, it needs to be adequately capitalized. If you are operating an undercapitalized small business, and competing against well-capitalized enterprises, you will be at a huge disadvantage. That is because the well-capitalized enterprises are able to leverage on the capital resources at their disposal to create competitive advantages for themselves. And relying on the competitive advantage created in that way, they are able to [soon or later] push the undercapitalized enterprises out of business. As a small business owner, what you need to do in this regard is to ensure that the line of business you venture into is one for which the amount of capital you have is adequate. Don’t try to bite more than you can chew, by venturing into a line of business than requires more capital than you have.
2. Improper marketing
The only way in which a small business can attain any real form of success is by making sales. If a small business is unable to make sales, it won’t survive. Now for a business to be in a position to make sales, it needs to undertake proper marketing. It is through the proper marketing that people get to know about the small business and the products or services it is selling. It is also through the proper marketing that people are persuaded to actually consider trying out whatever products or services the small business is selling. Challenges tend to arise when some small business owners opt to neglect the marketing aspect, and just assume that ‘business will come by itself’. Others opt to go about the marketing aspect in the wrong way — not targeting specific market segments, not spending enough on marketing, ignoring social media… and so on. The way to avoid this mistake is by thinking about the customer you are targeting in your small business. Then you ask yourself the question as to how you can get that customer to know about your business. And how you can persuade the customer to actually consider buying the product or service you are selling for the first time. And finally on how, having gotten him to try the product or service you are selling, you can get the customer to become a repeat buyer. Do whatever it takes to achieve those objectives and your marketing will be a success.
3. Poor quality control
If a small business is to survive, it needs to be selling its customers products or services that are of a decent quality. Many small businesses fail when the owners allow the quality standards of the products or services they are selling to fall to intolerable levels. What you need to develop are procedures that are to be followed consistently to ensure that the quality of the product or service being sold in your business never falls drastically. Remember, however well you do your marketing, if the product or service being sold is of questionable quality, you won’t succeed. People who try it out and find it to be of poor quality won’t buy it again. Worse still, word will spread about the poor quality of your product or service with terrible results for your business.
4. Poor hiring decisions
This is where we see entrepreneurs hiring people who are either under-qualified or overqualified for various critical jobs in their businesses. When you hire people who are under-qualified, you almost certainly find that they lack the skills and confidence to perform the roles you assign them properly. These potentially leads to a decline in the end product that the customer gets, which in turn leads to a decline in the business. On the other hand, if you hire people who are over-qualified, they tend to approach the jobs with the wrong attitudes, putting off customers and eventually leading to business decline.
5. Poor human resource management
Whereas some small business owners are able to make the right hiring decisions, they are unable to manage the hired staff properly – leading to disastrous results. You may find an enterprise that is able to hire the right people, but is thereafter unable to give them proper training, leading to very poor performance. You may find another enterprise that subjects is employees to harsh supervision, leading to very poor performance. You may find yet another enterprise that is unable to pay its employees decent wages, leading to terrible performance… the list of HR management blunders that cause small businesses to fail is long. The most important thing for you is to understand the principles of proper HR management and follow them to the letter, to keep your enterprise from failing on this account.
6. Improper financial management
We see many small businesses failing when the owners are unable to properly manage their revenues and their expenditures in the right manner. The starting point, when it comes to avoiding this mistake, is to ensure that you have a proper accounting system. Through the said system, you can keep track of the money coming into and the money going out of the business. You then need to put in place policies to maximize your business’ revenues, while minimizing the business’ expenditures. The latter aspect (of minimizing the business’ expenditures) has to be implemented without compromising the business’ operational standards. You need to ensure that the business always has a health cashflow, that the suppliers and employees are paid on time and generally that the business’ finances are managed in a prudent manner.