10 Good Reasons Why Small Enterprises (Small Businesses) Fail5 min read
You’ll agree with me that there are so many small businesses which have contributed a lot to the growth of economy. They have created employment opportunities for many families although some remain to be small throughout their operational life.
It is obvious that those who are starting new ventures have objectives to achieve. And to mention each business has got its own objectives to achieve such as maximization of profits and sales, minimize costs, maintain a certain level of production and labor force etc.
Failing of a business opportunity is what an entrepreneur won’t want to happen. Inasmuch as we agree with the fact that there are firms which have succeeded, we should also accept the fact that a good number of them have failed even before two years lapse after they commence business.
If aspiring entrepreneurs addressed the reasons why small businesses fail, then they will not fall to be victims of the same causes of failure. This is because they’ll be in a position to identify these causes and fix them before it’s too late.
Now you may be asking yourself as to why some businesses remain to be small throughout their operational life despite some of them making profits or are capable of growing.
4 Reasons Why Small Business Remain to be Small
1.) The owners of these businesses prefer not to expand their businesses. Some sole proprietors do not want to be bothered with the challenges of managing a big business. They don’t want to employ people to assist them in running their businesses but instead they prefer to be assisted by their family members.
2.) The nature of the product/service the business is involved in doesn’t allow expansion. There are people offering products/services which make it difficult for their business to grow.
3.) Lack of capital for expansion. There are small businesses which are viable and have the potential of growing but they lack enough capital. Such businesses have the challenge of securing funds from financial institutions. Lack of capital plays a negative role in hindering the growth of small businesses.
4.) Very low demand. If the business has a very low demand for its product or service, then at the end of the fiscal financial year/trading period the business won’t realize profits, and if it does, it’s very low, therefore the chances of it expanding are very minimal. Just to mention, realization of inadequate profits as a result of very low demand hinders the growth of small businesses.
However, there must be a starting point and as such, every business starts as a small entity and it gradually grows to a medium entity and eventually it becomes a big business entity which is either a private limited company or a public limited company. Note that a partnership business can also grow to become a big business.
Reasons Why Small Businesses Fail
1.) Wrong Reasons For Commencing Business: People who start a business for wrong reasons haven’t succeeded. Just because another person is making high profits in a certain line of business doesn’t mean that you will also make the same amounts of profits as him/her if you start the same business.
2.) Poor Business Management: When there is poor management of the business it becomes difficult for such a business to succeed in its operations. Finance, marketing, purchasing and selling, planning, hiring and managing employees is what most new business owners fail to execute effectively thus making their small businesses to fail.
3.) Lack of Commitment: Starting a business requires someone who is committed in ensuring that it succeeds. Neglecting the business will cause the business to fail. Many small businesses have failed because the owners didn’t take their time in monitoring performance and in marketing them. Some business owners leave their businesses to be managed on their behalf by incompetent people who lack book keeping knowledge and the knowledge of managing a business.
4.) Lack of Finances: Small businesses have failed because of lack of adequate finances. Some of the owners underestimated the amount of capital required and as a result of this underestimation some ended up running out of operating capital thus ending the operation of their businesses.
There are those who have no reserves which has led them not to be able to take care of loses and disasters when they occur thus making them to quit business.
5.) Over-Expansion of the Business: This has led to failure of many small businesses. This happens when there is borrowing of too much money beyond what the business requires so as to expand the business. Moving to markets that are not profitable is also over expansion of the small businesses.
An ideal expansion is the one that is driven by customers due to their high demand for the products and services which leads to high sales thus the business experiences good cash flow.
6.) Location: The place where the business is located is critical in determining its success. Small businesses have failed because of them being located in areas that are not ideal for business. They should be located in areas that are accessible, populated with people and has demand for their products and services.
7.) Personal Use of Business Money: This is the biggest challenge facing many small business owners. They withdraw money meant to operate their businesses to meet their personal wants and needs. If they continue to withdraw money from their businesses without returning it, their businesses will eventually run out of finances therefore forcing them to end the operations of their businesses.
8.) Lack of Delegation: Small enterprises have failed due to owners not delegating some of the duties to their employees. They think that if they delegate them, then their employees will not perform these duties as they would personally perform them. When such owners fall sick or are away from their businesses, then the operations of some tasks will be paralyzed till they resume to work.
9.) Not Diversifying: Small enterprises which have only one product/service to offer are prone to fail easily compared to those that have a variety of products/services.
10.) Procrastination and Poor Time Management: Postponements of tasks which the small business owners feel to be unpleasant to perform has made the small businesses to fail. An example of such tasks include following debtors to pay their debts (debt collection).
Time management remains to be a challenge for many people who own small businesses. If important tasks like delivering products to customers, purchasing stock etc are not handled in the appropriate time, then the business will lose its customers.
The above are not all the reasons why small businesses fail, there are more reasons.