Economy

Why small businesses fail

Published

6 years ago

March 6, 2019

An average small business owner does not factor in failure when starting up his or her venture . But findings have revealed that many small businesses fail in a couple of years as a result of various reasons that are often neglected by entrepreneurs .Also , experts say the harsh economic situation in Nigeria makes it tough for entrepreneurs who run small ventures to thrive . Statistics published in 2018 by the Small Business Administration , a renowned firm in small business analysis , showed that about one – fifth of business startups fail in the first year and about half of all employer establishments succumb to business failure within five years .

It further states that only about one third survive 10 years or more .

Findings show that some small businesses fail because entrepreneurs who established them did so for the wrong reasons . Experts note that prospective small business owners should always think of the right reasons for starting a business and that such thought will lead to building a successful venture .

Before investing in any venture , the prospective small business owner should have a passion and love for what he will be doing and must after careful investigation , believe that his product or service will fulfil a real need in the marketplace.

A former President , Association of National Accountants of Nigeria, Dr . Sam Nzekwe , notes that the lack of determination , patience and a positive attitude towards ones venture can also lead to its failure .

“ So, the small business owner must have these attributes in order to thrive . When others throw in the towel, he should be more determined than ever , ” Nzekwe adds .

Small business owners learn from their mistakes , and use what they have learnt as lessons to succeed the next time round. Studies of successful business owners have shown that they attributed much of their success to their abilities to build on earlier failures or using such failures as a learning process .

The poor management of resources can also lead to failure in a small business. “ This can be classified as a major reason why small businesses fail , ” Nzekwe says .

Experts say this is because new business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling , production , hiring and managing employees . They note that if the business owner does not recognise what they do not do well and seek help , the company may fail and go out of business .

To remedy the problem, small business owners can educate themselves on skills they lack , hire skilled employees , or outsource work to competent professionals .

The small business owner has to avoid anything that will make him to neglect his business, as this can also lead to the downfall of his venture . So the entrepreneurs should regularly study , organise , plan and control all activities of their business operations . This includes the continuing study of market research and customer data , an area which may be more prone to being disregarded once a business has been established.

The entrepreneur should be a strategic thinker and should be able to make a vision a reality . He should be strong enough to confront change , make transitions , and envision new possibilities for the future .

Small businesses also fail as a result of low capital . This is one common mistake why many small ventures fail in Nigeria, especially when you consider the harsh economic realities across the country. Nzekwe, however , notes that the Nigerian economy has not helped matters when it comes to the survival of small businesses .

“ For instance , the foreign exchange policy of the CBN ( Central Bank of Nigeria ) is not good enough for businesses across the country.

“ The problem we have is that you don’ t even know the actual rate which the dollar is being exchanged for our naira as it fluctuates virtually every day . There are too many foreign exchange rates in one country. Many people have different rates which they believe is the exchange rate for Nigeria. ”

He adds that although the CBN pegged the foreign exchange rate at about N 307 per dollar , it is not always easy to get the forex .

“ Is the forex available ? How many businesses can access foreign exchange at that rate ? People complain of foreign exchange scarcity up till today despite all the policies of the CBN to ensure its availability. This is a problem and it shows that the foreign exchange policy of the bank is not working as expected.

“ The policies are confusing, there are a lot of ups and downs with the policies and I must say that the policies are not friendly to businesses across the country. So this again is another reason why not only small businesses suffer but it affects medium – sized businesses too . ”

Despite the stiff economic situation in Nigeria, prospective small business owners should avoid the common mistake of many failed businesses that were started with insufficient operating funds .

New business owners often do not understand cash flow or underestimate how much money they will need to get the business started . As a result , they are forced to close before they have had a fair chance to succeed . They also may have an unrealistic expectation of incoming revenues from sales . Therefore , it is imperative to ascertain how much money your business will require. You need to know not only the costs of starting your business but the costs of staying in business. It is important to realise that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs .

Locating your business in a wrong place can also lead to its eventual failure . Location is critical to the success of most local businesses . A bad location could spell disaster to even the best – managed enterprise . In some of our earlier AM Business articles , we discussed what an entrepreneur should look out for when trying to locate his venture in a certain place .
Some of these include knowing where your customers are ; traffic, accessibility, parking, and lighting ; and warehousing or equipment storage needs. Others are location of competitors ; condition and safety of the building ; local incentive programmes for business start – ups in specific targeted areas ; the history, community flavour and receptiveness to a new business at a prospective site .