Common Causes of SMEs Business Failure
Numerous SMEs close shop nearly every day. It is estimated that 80% of all small businesses fail within the first year of operation and as much as 90% of all small enterprises fail within the first two years of operation, primarily because many entrepreneurs lack the basic knowledge and experience in handling the challenges of running their businesses in the initial stages. Small businesses fail for a variety of reasons. The following are some of the common problems that SMEs encounter during the first few months of operation. Entrepreneurs should be acutely aware of these pitfall and must work diligently to address them in order to avoid quick business failure.
Inadequate Research and Planning
Careful planning is essential to business success and this is often reflected by the business’ stability and profitability. More often than not, business persons are so eager to launch their businesses that they neglect proper preparation, which invariably includes coming up with a well-developed business plan. The business plan should articulate and illustrate the vision and mission of the business, while at the same time acting as a financing template that convinces financiers (investors, bankers and other lenders) to assist you in the pursuit of that vision. Therefore the first step in any business planning process is for one to devise a carefully constructed and well-detailed business plan to ensure the success of the business idea. This normally requires that a detailed market research and feasibility study are carried out before hand and the findings of the study then form the basis of the business plan. A business plan constructed from the head or from thin air, which is not supported by basic market analysis and research is likely to fail. It follows that if there are deficiencies in the research process, or the data collected lacks credibility and objectivity, the whole basis of the business plan will also be faulty, leading to inevitable business failure.
Another frequent mistake that many small businesses make is underestimating the amount of funding necessary to adequately finance the enterprise. This is akin to a jet liner that takes of for a 1000 mile journey with fuel for perhaps 300 or 400 miles. Such a plane will inevitable be forced to land somewhere midway through its journey or worse still crash-land when fuel runs out. Lack of funding restricts the business’s capacity and will greatly threaten the business’ potential growth and stability. Business owners should always avoid the temptation to go into business without the requisite basic resources and should instead try to correctly estimate the amount of money needed to launch and support their business. It is imperative that the entrepreneur ascertains the amount of money a business will require, which includes not only the costs of getting the company off the ground, but also the resources that will be required to keep the business afloat. As a general rule one should avoid getting into the business if you have insufficient capital to cover normal operating costs for about a year.
Poor marketing strategies
Some business are lucky to have a much needed product or service that meets a real need in its customers sometimes at an attractive competitive price. However it is completely possible for such a business to be at risk for failure because its targeted customer base may not be sufficiently aware of the company’s products and services due to poor marketing. Basic advertising is therefore vital for any business to succeed. If the business owner is not aware of how to properly market their products to the public, they should seek assistance from a marketing or public relations expert who can help them promote their business effectively. In addition, small business should use social media platforms that have a wide reach and marketing messages can be tailored for a particular audience. In modern business, tools such as having a professional looking website can be indispensable. Facebook, Twitter and other social network marketing tools are also effective low cost tools to get a business up and going due to the large number of internet users which is growing everyday. The company website should have basic information about the business, its location, products, and services offered and pricing where possible.
Unreliable Supply Channels
For your business to succeed, you need the capability to maintain an accurate inventory of goods and that is invariably linked to the dependability of your business supply chain. Some business fail because they are let down by unreliable suppliers, making themselves unreliable. Undependable service providers can also sink your business. Through proper business networking and thorough research, an entrepreneur can successfully cultivate efficient supply channels to find reliable people whom they can work with. It is critical to maintain effective relationships with suppliers for the smooth operation of your business and to actively seek trustworthy service providers.
Bad and Unqualified employees
Labor costs are the largest expense for many small businesses and business owners should ensure that they get the correct skills and remunerate them properly. A business should also employ an adequate number of workers with the necessary skills and credibility for their given tasks. Most small businesses employ unqualified staff in a bid to save on employment costs but they soon realize that these employees may end up being mere numbers who are usually unproductive . In this vein, employing unqualified people may be just a waste of money for unnecessary labor costs. If there are too few employees at hand, the workload will be overwhelming for the staff to handle, and as a result, the company’s overall performance may suffer. An entrepreneur should be aware of this employment challenge and create some sort of equilibrium in the workforce by delegating tasks to competent employees and to avoid hiring those who are not experienced.
Overexpansion and Overtrading
Overexpansion occurs when business owners confuse their company’s success with how quickly they can expand their business. This is the leading cause for many small business failures ( see our Article on Overtrading Risks ) . Business bankruptcy can be avoided if the entrepreneur concentrates on the slow and steady growth for the business rather than rapid expansion. Steady growth allows the business to build a solid customer base and enjoy steady profitability and stability. Only then can the business owners then work on developing and expanding their operation.
Selecting a bad location
The location of your business is critical for the success of the business. A good location may help a business to thrive, whereas a company situated in a poor location will be at a disadvantage. Some factors to consider when establishing your business’ location is where the targeted customers live or shop, the traffic, accessibility, and parking, the physical distance from competitors, and the conditions and outlook of the business premises.
The above list is not exhaustive but should offer many businesses out there, a basic template for successfully managing a business.
Clive Mphambela is a Banker. He writes in his capacity as Advocacy Officer for the Bankers Association of Zimbabwe. BAZ expressly invites stakeholders to give their valuable comments and feedback related to this article to him on firstname.lastname@example.org or on numbers 04-744686, 0772206913
Common Causes of Business
Common Causes of SMEs Business Failure