22 Reasons for Small Business failure and How to Avoid Them
Business failure is a common phelomenon but it can be avoided.
Business failure rate within the first 18 months is put at 80% by Bloomberg. All small business owners usually start their businesses with excitement and great expectation to succeed. Along the line, you discover that most of these small businesses usually fail within five years of existence. The rate of small business failure can be reduced if only our small business owners can pay attention to the factors responsible for the businesses failure.
The reasons for small business failure are discussed below.
No business plan
People plan for so many things such as vacation, career, marriage and even food to eat. When it comes to business, it is unfortunate that many people just venture into a business without adequate plan. Some few people having business plan for their small business do not appreciate its importance. They see it as a mere piece of paper. The truth is that, a person who doesn’t plan (to succeed) can never succeed. Every business owner should endeavour to develop a business plan for his business.
Lack of adequate fund
This is close to the point mentioned above. Some people under-estimate the funding requirement for their business due to lack of adequate planning. Your funding requirement is not limited to the initial capital needed to jump start the business. You equally need working capital for the day to day running of the business until the business begins to generate cash. Running a business below the capacity that can return profitability will lead to business failure. There are various ways by which you can raise capital.
Read Also: Funding Options for Small Business
Lack of operating goals and objective
Do you clearly define goals and objectives of your business? If not, your business may be heading towards a wrong direction. Without clear goals and objectives, it is easy to lose focus. The probability that ny business without a focus will experience business failure is high.
Failure to measure goals and objective
It is not enough to set goals and objectives. You should be able to measure how close you are to your set goals. If you are measuring up to the set goals, give kudos to yourself. If you are not, it is a signal that you need to quickly revisit your plans and strategies. But if you don’t measure your goals and objectives, you will not know when to take necessary actions until things get out of hands. This may ultimately lead to business failure.
Cash flow problem
Cash is the life blood of any business. You need cash to run your business. You can still run a business for some time if you are not making profit. But you cannot run a business without cash. That is why every business owner should develop their skills in the area of working capital management. It is possible to report profits and the business still experience business failure. Paper profits cannot sustain any business. Your profits should be backed up with cash.
Read Also: Effects of selling on credit to customers
Lack of knowledge about the industry and the target market
How well do you understand your industry and target market? Who are your customers and they behave? What are their income levels? People that rush into business because they feel they can easily make money usually end up getting their fingers burnt. Seek to understand your industry and your target market before you invest your money into the business, no matter how lucrative it looks like.
Lack of differentiation
In business, it is true you don’t need to re-invent the wheels. Whatever your business, there are other people doing it. But you should not just copy a business. Don’t join the bandwagon. Differentiate your business. That is the only way you can stand out in the market place. You can differentiate your business in so many ways. For example, you can offer better quality service. You can offer complementary products or services. I don’t want to mention pricing as this can lead to price wars.
Poor marketing
Lack of adequate marketing is another reason for business failure. No matter how innovative your business idea may be, you need to market it. Don’t assume that people will start knocking at your door the moment you open your small business. You need to create awareness before you start enjoying patronages.
Competition
If you are starting a business in a very competitive market, you must prepare for competitors’ actions and reactions. Underestimating what the competitors can do (such as price war) can lead to business failure.
No comparative advantage
A business that is not having any comparative advantage over its competitors is on its way to the grave. Your comparative advantage may be low cost. Possibly, you buy in bulk which makes it possible to enjoy reduced prices or good quantity discounts
Poor management skills
As an entrepreneur, you need to wear many caps at a time if you don’t want to experience business failure. Lack of management skills will lead to business failure. You should know how to manage resources, both human and capital.
Poor pricing strategy
Any pricing strategy that does not take all costs, both fixed and variable costs and the margin into consideration, will sooner or later lead to business failure. Your pricing strategy should ensure you sell at a price that ensures profitability.
Board Crisis
Crisis within board members or partners if unresolved on time will lead to business failure. There is nothing bad in having disagreement. All differences have to be pushed aside and the interest of the business protected
Lack professional advice
You cannot do everything by yourself. There are certain areas where an entrepreneur needs professional advice. If you are too tight fisted to the extent you don’t want to pay for professional services, you may likely experience business failure. If you know how to negotiate well, you can get some of these services at reasonable prices. Some professionals will be ready to assist you so that they can grow with you.
Lack of good customer care
It is always said that customers are kings. They may not be right but if you want to remain in business, you should give them the best they deserve. Show me any business lacking good customer care, I will show you another candidate for business failure.
Poor location
Lack of good location for the type of business you do will lead to business failure. For example, it will be wrong to locate a business selling computer accessories at vegetables market. Choose location that is right for your business.
Over dependence on one customer
A small business may not have a large customer base initially. This is understandable. But it must not remain with just one customer over a long time. If you stay with just one customer and he decides not to do business with you again, that may lead to business failure
Wrong hire
A wrong hire can hinder the growth of a business. It can even lead to total business failure. In business, you should not only focus on skills, attitude matters. You should familiarise yourself with tips on staff hiring process in small business.
Overtrading
Every business like to grow and it is a good desire. However, growing too fast may back fire. Taking too much orders more than you can supply will hurt your business. Expanding branch networks too fast will put too much pressure in your cash flow. Every expansion comes with additional overheads. When growing is faster than what your cash flow can support, business failure is inevitable. To avoid business failure, it is better to grow slowly and systmatically. Don’t bite more than you can chew.
Lack of proper bookkeeping
Business should have a good accounting system that will ensure tracking of income and expenses. Failure to have accounting records put in place may lead to business failure. If you don’t maintain good bookkeeping of financial transactions, you will not know when your finance is out of other. You may not even know how to price appropriately. As discusses above, lack of good pricing is another reason businesses fail. Therefore, to avoid business failure, it is good to keep proper record of your financial transactions.
Overspending
Overspending is another cause of business failure. When a business is just starting, you need to spend your money judiciously. You buy what is needed; not want you want. Many business owners make the mistake of investing too much in acquiring assets such as cars, furniture and other things that may not be needed immediately. Every expense will seem reasonable when you have cash. That is why business owners usually blow off their cash on irrelevant things. Before they realise it, they have exhausted their funds having nothing left to run the business. To avoid business failure, learn how to prioritize and justify your spending.
Read Also: How to Write A Good Business Plan
Tax Issues
Government expects every business to pay levies and taxes such as sales tax, income tax and others. When a business involves in tax avoidance or tax evasion schemes, this will lead to litigation. This is one of the strong reasons businesses fail. If you want to avoid business failure, I advise that you engage a tax practitioner as early as possible. Don’t wait till the time you run into trouble before you do this. A stitch in time saves nine.