Why do small businesses fail? And what can you do to avoid failing in business? I advice you read on to find out.
It is no longer news that 99% of all new business ventures fail in the first ten years. Now since the dream of every entrepreneur is to build a successful business, I have tactfully highlighted 12 major reasons why small businesses fail and how you can bulletproof your business against them. If you are ready to learn, then read on.
“There are no disasters in business that you can’t avoid if you see them coming and make the adjustments.” – Boune T. Pickens. Jr.
Why Small Businesses Fail and How to Avoid It
Table of Content
- 1. Lack of Managerial Skill
- 2. Wrong Business Decisions
- 3. Harsh Government Fiscal, Economic and Monetary Policy
- 4. Inability to Move Swiftly With Trend and Changing Technology
- 5. Weak Management
- 6. Fierce Competition
- 7. Wrong Business Location
- 8. Lack of Knowledge and Experience in the Chosen Field
- 9. Bad Debt
- 10. Insufficient Capital
- 11. Internal Fraudulent Activities
- 12. Lack of Entrepreneurial Skill
1. Lack of Managerial Skill
When a small business owner lacks the managerial skill required to drive the business to greater heights, that business is bound to fail.
Building a business without the necessary managerial skill in place is a futile adventure. An entrepreneur that wants to succeed must be able to effectively handle the employees, cash flow, production line and so on; or better still; the business owner must be able to hire a good manager to run the business.
2. Wrong Business Decisions
This is common to every human being irrespective of your field. Sometime ago a friend of mine, after carrying out critical analysis on a particular situation came up with a decision he considered favorable. But on implementing that decision, it backfired and at the end of the day, my friend had several lawsuits dangling on his neck.
So whenever you have decided on an action to be implemented on your business, consider asking friends, business partners and professionals for advice. It is going to save you the stress of cleaning up the mess resulting from wrong business decision taken.
“Before making an important decision, get as much as you can of the best information available and review it carefully, analyze it and draw up worst case scenarios. Add up the plus or minus factors, discuss it with your team and do what your guts tell you to do.” – The Mafia Manager
3. Harsh Government Fiscal, Economic and Monetary Policy
This is an open killer of both big and small businesses. As an entrepreneur, you must be on guard to bulletproof your business against the ever changing government fiscal and monetary policies.
Since you cannot influence or alter the government’s decisions, you must be ever prepared to swiftly adjust your business to prevent it from being hit by the adverse effect of unfavorable government policies. Instances of such government policies you must be on guard against are business taxes, double taxation, duties and levies, inflation, exchange rates and so on.
“How fast a company can respond in an emergency is a measure of its corporate reflexes.” – Bill Gates
4. Inability to Move Swiftly With Trend and Changing Technology
It is obvious that some people hate change, some resist change while others embrace change. Change is constant, so it is either you align your business with the trend and ride to the top or you remain stagnant and eventually fold up. You also need to constantly upgrade your technological strengths as swiftly as possible.
“Your greatest and most powerful business survival strategy is going to be the speed at which you handle the speed of change. That speed of change is trend.” – Ajaero Tony Martins
As an entrepreneur, you must be on your toes sniffing the air for available trends and new technologies you can take advantage of. Examples of great industrial trends and technologies are computers, e-shops on the internet, automated accounting, e-payment and so on. Remember, trend is your friend, not your enemy.
This is the fundamental reason why small businesses fail to survive. A standing rule in the business world is this:
“The success or failure rate of any business is directly proportional to the strength and level of professionalism of the management.”
From the first day of business, a very strong management is needed to ensure the survival of your business. You might say employing professionals such as attorneys and accountant is very expensive but they will do your business good in the long run.
Better still, you can consider bringing in these professionals as partners. By applying this method, you will not pay them salaries while employing their services but they will share in the profit of the business. It is a win-win situation. No matter what tactic you wish to apply, ensure you have a strong management strategy.
“My most important word in business is ‘Strategy’ and the reason is this: The speed at which your business grows is directly proportional to the overall strategy deployed on that business and the team behind the creation of that strategy.” – Ajaero Tony Martins
6. Fierce Competition
Most small business owners are afraid of competition because many profitable ventures have been forced to shut down due to fierce competition. I want to let you know that even if you are the inventor of an idea, that will not stop competitors from coming in.
“In business, the competition will bite you if you keep running. If you stand still, they will swallow you.” – Victor Kiam
So your best bet is to keep an eye on your competitors, utilize every available innovative idea and make your customers happy. You can also implement some of the best protective firewalls to keeping your competitors at bay. These firewalls are: Trademarks, Patents and Copyrights.
7. Wrong Business Location
The location of a business is such an important factor that can never be over emphasized. If your business is located in an interior area than your competitor’s, you are bound to fail.
Factors to consider when choosing a business location are road network, nearness to high traffic zone, accessibility and patronage level of customers, population, demographics and so on. For example, imagine a business that sells motivational books located in brothel. What do you expect? Nothing but outright failure.
8. Lack of Knowledge and Experience in the Chosen Field
I don’t need to write much on this, it is self explanatory. You can’t succeed in a field where you have no knowledge and experience about. No more, no less.
“Risk comes from not knowing what you are doing.” – Warren Buffett
9. Bad Debt
This is another reason why small businesses fail. When a business is owed much as a result of free credit line to customers.
That business is bound to fail. One key role of an entrepreneur is to keep an eagle eye on the cash flow. Since a business must never be short of cash and customers too must be kept loyal, the business owner must establish a certain credit limit and a fixed time from date of purchase to pay up.
“There is one paradoxical characteristic every entrepreneur must possess to succeed. An entrepreneur must be able to persuade his debtors to pay their debts promptly and at the same, must tactically delay payments to his creditors.” – Ajaero Tony Martins
Raising capital is the primary duty of an entrepreneur because cash flow is the life blood of business. Insufficient capital can kill even the most profitable business.
In a case where there is insufficient capital and the business is finding it difficult to access funds from bank and investors; the entrepreneur must resolve to bootstrap financing, which is working with the limited cash, eliminating unnecessary expenses, establishing a credit line from suppliers and producing only on demand to avoid tying up resources.
“Business. It’s quite simple; it’s other people’s money.” – Alexander Dumas the Younger
11. Internal Fraudulent Activities
Bad employees can be a chief cause of failure of any business. When you have illegal business transactions and cash siphoning being carried out by employees at the expense of the business, that business is bound to face liquidation. So an entrepreneur must keep a keen eye on the activities of employees with respect to the business.
“There will be times when you will have to be abrasive, even brutal to members of your staff. Don’t worry that your people will say bad things about you because of this. They already have. But in general, try to be pleasant and accommodating. Try to please the greatest number who work for you that you can; antagonize the fewest. Blow smoke.” – The Mafia Manager
I will prefer to call this the ultimate reason why small businesses fail. When an entrepreneur lacks the necessary skills such as leadership skill, cash flow management, sales, persistence and self belief and so on; such an entrepreneur is bound to fail.
An entrepreneur is the head and pilot of the business. Consider an airplane being flown by an inexperienced young pilot? The outcome can be better imagined.
In conclusion, these are the 12 chief reasons why small businesses fail. Having noted each one of them, you can strive to avoid them; while growing your business.