See the 15 Most Common Reasons Why small businesses fail:
- Wrong choice of business
- Little or no research before startup
- Bad business location
- Little startup capital
- Lack of planning
- Bad management
- Poor personnel management
- Bad cash management
- Not doing enough marketing
- Poor stock control
- Bad customer service
- Not keeping accounting records
- Poor Electricity Supply
- Activities of smugglers
Research has been carried out why small businesses fail.
The results revealed a good number of reasons why small businesses fail.
This article is, therefore, focusing on the most common reasons why small businesses fail. As much as possible, tips have been offered to help you save your business from failure.
Why small businesses fail: Wrong Choice Of Business
Going into any business in which you have no skill, training and experience can result in business failure.
For example, you cannot run a pharmacy business unless you are a pharmacist. You cannot run a hospital if you are not a doctor.
You should not go into any business just because you like the idea. Or that you see people succeeding in that business.
Therefore, you need to have the necessary Training, Skills And Experience needed to succeed in any business before you go into it.
Why small businesses fail: Lack of Research
Many people just go into a business without researching the business idea.
Moreover, others start businesses without having enough knowledge of the nature of the business they are going into.
Researching the business idea is very important because of the following reasons:
- You need to understand the industry
- There is need for you to ask yourself whether you have what it takes to succeed in the business.
- You need to know the level of competition in the market
- Also you need to know your target customers
- And their tastes, preferences and buying habits
- And many more details concerning the business
Furthermore, you can get some useful information from the internet and business newspapers and magazines.
Therefore, you need to gather as much information as possible about the business before you go into it.
Do not be shy to ask people questions about the business.
Why small businesses fail: Wrong Business Location
Still another reason why some small businesses fail is wrong business location.
If your business relies on foot traffic, location is a strategic necessity.
A poor location can make it difficult for you to acquire new customers.
For example, if you are selling automobile parts and you locate your business in areas known for bookshops, you are not likely to succeed.
The following tips might help you:
- Put your business where everybody can see it.
- Check the population of the area
- And that there is good population
- Make sure that it will be easy for customers to come in and buy.
- You should also locate your business where there are basic facilities, such as electricity, water, good roads and security.
Low startup capital
Low startup capital is yet another reasons why small businesses fail in Nigeria.
For instance, little startup capital can affect your small business in the following ways:
- You will not be able to buy stocks in large quantities.
- It will be difficult for you to get trade and cash discounts
- Your business cannot compete in the marketplace
- And it will be difficult for your business to grow
- You cannot take advantage of sudden business opportunities
- Obtaining loans from bank will be very difficult
Therefore, to avoid business failure, you should make sure that you are able to raise the amount of capital you need before you launch your business.
Too little inventory will hurt your sales. Too much inventory will hurt your profitability.
Why small businesses fail: Lack of planning
As Benjamin Franklin puts it, “if you fail to plan, you are planning to fail”.
From the above statement, you will see that proper planning is one of the first things you need to do before you start any business.
Planning will enable you to:
- Remain focused on your vision for the business
- You will have a working document you can always refer to
- identify likely future problems
- Find temporary solutions to them
- Work out where you want your business to be
- And when you hope to get there.
There are many methods you can use to collect relevant data for planning purposes.
You can gather data for planning purposes from the following sources:
- Oral or personal interviews
- Personal observations
- The internet,
- Industry journals, books and other sources.
Therefore, to prevent business failure you should make business decisions based on facts and figures. Do not guess.
Why small businesses fail: Bad Management
Bad management is yet another reason why small businesses fail in Nigeria. Experience has shown that some business owners are themselves responsible for the failure of their businesses.
The following tips should enable you to manage your business properly:
- You should work out good policies that should guide the internal running of our business
- It is your duty to set standards which your employees should follow.
- You need to hold meetings with your senior staff regularly to see if any of them has good ideas that could move your business forward.
Most importantly, you should bear in mind that the success or failure of your business depends on the choices and decisions you make.
Why small businesses fail: Poor Cash Management
Another reason why small businesses fail in Nigeria is due to poor cash management.
For examples, some business owners mix their personal expenses with business expenses.
This has the effect of making it difficult for you to actually know how much it is costing you to run your business.
Moreover, to succeed in business you don’t just need cash flow, you need positive cash flow.
For example, if the amount of cash flowing into your business is consistently less than cash outflow, you business is likely to fail. You should never allow negative cash flow.
In addition, failure to create cash budget to track your business incomes and expenses is one sign of poor cash management.
Moreover, some business owners pay large amounts of money from sales instead of from the bank.
Most importantly, if you have a business bank account, you should prepare rAnd they do not prepare bank reconciliation statements.
Therefore, if you do not want your business to fail, you should learn how to manage your cash efficiently.
Poor Personnel Management
Poor personnel management is one of the reasons why small businesses fail in Nigeria. Your employees are your assets because they play various important roles in your business.
It is people that make a business to succeed or fail. Therefore, to get the best from your employees, you treat your employees well.
The following guidelines might help you to keep your employees happy:
- Pay your employees salaries according to the the work the do for you.
- Also do not delay their salaries
- Allow them to take annual vacations
- Give promotion and pay raises to those who deserve them
- Train and retrain your employees
Remember that the quality of services you receive from your employees depends on your input into their training and welfare.
Why small businesses fail: Insufficient marketing
Still another reasons why small businesses fail in Nigeria is they do not do enough marketing.
Many small business owners just seat down in the comfort of their shops waiting for customers to come and buy.
In other words, they are not really fighting competition.
To avoid business failure, you need to advertise and promote your business.
You should advertise your business on local radio and television stations.
In addition you can also advertise your business on the social media such as:
- Face Book,
- twitter and other
- and others
Furthermore, you should use word of mouth marketing to drive sales. After all word of mouth marketing is free. It is also effective.
Most importantly, when you advertise, remember to insert your contact details in all your outgoing adverts materials. Examples are email address, telephone and location address.
Poor stocks management
Poor stock control can make your business fail.
There are several instances where employees make away with stocks on regular basis without paying for them.
This happens mainly where internal control is not effective. Or stock records are kept manually.
Furthermore, others recycle stocks back to suppliers at half their selling prices.
Such employees later go back to the suppliers to collect the money for the stocks and use them for themselves.
Therefore, no matter the size of your business, you should put in place a good internal control system to track your stocks. A computer soft ware is a good option.
Why small businesses fail: Poor customer service
Poor customer service scares away customers.
If you give your customer excellent customer service, they will continue to buy from you.
Do not allow any customer to leave your shop unhappy. Unhappy customers can spread negative news about your business.
Consequently, you will not be able to keep your current customers.
Why small businesses fail: Not Keeping Financial Records
Your business can fail if you do not keep good accounting books and records of your financial transactions.
For example, you need to keep records of every Naira/dollar you receive or spend.
In business every Naira/dollar counts. They add up at the end of the year.
Accurate financial records will enable you to prepare your annual accounts.
From the annual accounts, you will be able to know how well or badly your business is doing: which direction your business is going.
Stats from your annual accounts should enable you to plan for the future of your business.
In addition, you will be able to know the net worth of your business.
Poor electricity supply
Poor or no electricity supplies is one of the major causes of small business failure.
For example, banks, petrol filling stations and many other businesses run power generating sets almost throughout the day to power their businesses.
There is no doubt that using generating sets to power a business is a most expensive thing to do. This is because some of the businesses operate on very little profit margins.
Although the big businesses may be able to navigate their way to profitability, the small businesses are usually the hardest hit.
This explains many of such businesses find it difficult to survive the rough and tough business terrain.
Activities of Smugglers
Another factor that negatively affects both big and small businesses is the activities of smugglers.
Smugglers pass the back door to bring in, at cheaper prices, goods that are produced in the country. Often times, the smuggled goods are of superior quality.
Consequently, the buyers will go for the high quality products, leaving the local businesses unable to sell their wears.
And this makes it difficult for small businesses to complete in the marketplace.
Consequently, the weak small businesses are forced to shutdown.
Businesses fail because of poor leadership.
It is your responsibility to make sure that you let your employees know the direction your business is going.
The leadership must be able to make the right decisions most of the time.
From financial management to employee management, leadership failures will trickle down to every aspect of your business.
The most successful entrepreneurs learn, study and reach out to mentors to improve their leadership skills.
You need to be able to develop a great product and value proposition that sets you apart from the competition.
Furthermore, do not fail to understand what your competitors do better than you.
Therefore,if you fail to differentiate, you cannot build a brand that keep your customers engaged.
Ignoring customer needs
Failure to pay attention to the customer needs of your business can make your business to fail.
Without a clear definition, you will be unable to effectively develop, market, and sell your product or services.
Although every business will tell you that the customer is #1, but only a small percentage of businesses actually act that way.
Furthermore, businesses that fail lose touch with their customers. You should keep an eye on the trending values of your customers.
Find out if they still love your products:
- Do they want new features?
- What are they saying?
- Are you listening?
To prevent business failure you should not ignore the needs of your customers, especially the regular customers. It’s key to have a clear definition of the services you offer.
Inability to learn from failure
Everybody makes mistakes. In business, sometimes we fail in one way or another.
Unfortunately, many businesses do not learn from their failure.
Furthermore, you should remember that failure is an opportunity to try harder.
Creating too many branches
Creating many branches is a good thing if it is done at the right time.
However, if you scale your business too quickly and too early, you can destroy your business.
For example, in Nigeria just over a decade ago many banks created branches here and there.
But not too long after, some of the branches were found to be unsustainable.
Consequently, the Central Bank instructed the banks to merge.
And now, the banks are strong and thriving.
Therefore, you should not scale your business unless you are ready.
Lack of profit
A large number of businesses fail because of their inability to make profits.
Revenue is not the same as profit. As an entrepreneur, you must keep your eyes on profitability at all times. Profit makes business not only to survive but to grow.
Lack of focus
Similarly, a lot of small businesses fail because of lack of focus. They fail to define their competitive edge and lose out in the competition.
Without focus, it will be impossible for you to have a broad strategy on a startup budget.
Therefore, to keep your business up and running you must have focus, direction, drive to succeed.
Why small businesses fail: External factors
There are many external factors that can make a small business to fail.
- natural disasters
- exchange rate fluctuations
- and lots more
Although some of them are beyond your control, but you can control they impact on your business.
No succession plan
Failure to have succession plan can make your business.
Your business needs to identify future leaders in advance.
Therefore, your business need to map out processes to fill vacancies brought about by:
- unexpected departures,
- or death.
Lack of mission statement
You need to have a brief statement that states why your business exists.
In other words, it should state in clear terms why you are in business.
Furthermore, it should describe your target market and the services/products you offer.
Finally, your mission statement, in just a few sentences, should communicate the essence of your business to your employees, customers and the general public.
You are not accountable
You should remain accountable to your business, despite the fact that the business belongs to you.
Treat yourself as an employee. Set measurable goals and hold yourself accountable.
On the contrary if you only plan to work in your business a couple of hours a week, you cannot grea results.
Owning your own business requires focus and commitment. Educate yourself about the wide range of options and technologies that are available.
Simply put, what you get out of your business is a function of what you put into it.
If you are only willing to put in a few hours a week, expect to get a few hours a week of income. There are no shortcut.
Not connecting with mentors
There are many successful people within your own existing network, and you can also make new connections.
When you connect with your mentors, they will make available to you their wealth of experience, because they have been there before you.
Therefore, connecting with mentors can help you to know some of the things it takes to be an entrepreneur.
Failure to get others to believe in you.
If you must succeed as an entrepreneur, you must be great at selling your vision.
You might need to convince vendors, partners, landlords, investors, employees, or a list of more people that you are someone they can comfortably do business with.
Not prepared to fail
Do not fear failure. Several of the big names in business you hear of today have failed a couple of time before.
Expect failure but don’t fear it. Think of it as a normal part of your business. It is necessary because it:
- is good for your business.
- teaches you.
- It helps you make the right decision the next time.
Remember that failure is an opportunity to try harder. Do not quit because, in business, quitters do not win and winners do not quit.
Failure to focus on your customers
Your customers are your boss. They can keep you in business just as they can as well put out of business.
If you listen to them, you can improve your products or services.
On the other hand, if you ignore them, they will fire you.
Furthermore, remember that customers do not disappear; instead they take their businesses to your competitors.
Most importantly, you should always reach out to your customers. Ask them questions to find out what they like or dislike about doing business with you.
Finally you should work on the feedback you get from your customers. Negative feedback gives you a chance to improve.
Not Staying profitable
Staying profitable will solve many problems. The lack of profit could put you out of business even if you have record sales. Forget sales. Forget your revenue. Forget the total number of customers. Always be mindful of profitability.
Why small businesses fail: Credit sales
It is good to be successful but it is better to remain successful.
However, to remain successful, you need to increase your sales.
That said, you should insist on getting paid in advance. As for deposits or full payments in advance.
Most importantly, you should be selective in offering credit to customers, avoid it if possible.
Not preparing for the unexpected
If you will succeed in business, you must figure out how to deal with the unexpected.
For example, if your best salesperson quits tomorrow? How long will it take before you will replace her? And how can you be sure that the next person you are hiring will be able to sell?
You need to have a system that can help you to recover from unexpected events. Systems are crucial to recovering from a disaster. Formal procedures are key. Identify the key parts of your business and think about what it would take to recover losing any of them.
In conclusion, it is true that some businesses fail. It is also true that some of them do succeed.
Entrepreneurs who lead businesses to success understand that it takes a carefully planned and executed strategy.
Most importantly, if your business fail or is threatened, do not quit. After all you can blame a man for falling you but you cannot blame anybody for failing to get up.
By Samuel Ijenhi
B. Sc. Accounting [University of Benin]
Benin City, Nigeria.