That micro, small and medium enterprises are globally, acknowledged as the engine room of economic, growth and development is certainly like walking through an over beaten path. The challenge is how to ensure their survival, growth and sustainability. Evidence, research and experience have shown that most small businesses that are started-up every year do not survive. Our concern in this write-up is to review why most small businesses fail and then offer our modest advice on how you as an entrepreneur can prevent your business from failing.
For us to understand why most small businesses fail, we need to appreciate the anatomy of micro, small and medium enterprises –
- They are in most cases, family owned and owner-managed
- Key employees are usually family members
- They operate on the informal platform and are not in a hurry to migrate to the formal platform.
- They have poor accounting and record keeping practices, while internal control arrangements are weak.
- They are highly under capitalized, mainly because of their weak access to finance.
- Business planning is seen by them as cosmetic.
- Statutory, regulatory and tax matters are not usually given the required attention.
- Sound management practices are lacking, with no clear reporting lines.
- Management succession planning is not given the needed attention
- They have poor risk management practices
- There is near absence of financial management practices (including very weak cash flows management).
- There is lack of strategic visioning and management.
It is noteworthy that the above internal challenges are also the factors that erect barriers to the survival, growth and sustainability of the businesses. The critical departure point is for MSMEs operators to understand their internal challenges and take concrete steps to drive their business away from “layman businessmen” approach, to a truly entrepreneurial enterprise.
Specifically, most small businesses fail or experience stunted growth for the following reasons:
- Starting the business on a weak enterprise foundation. We see weak enterprise foundation as characterized by (absence of a start-up business plan, lack of entrepreneurial vision, wrong business location and not knowing in depth the nature of the market).
- Weak management, leading to poor management practices that hold back the survival and growth of the business.
- Poor Record Keeping, financial reporting and financial management practices (including very weak cash flows management).
- Poor customer-orientation that leads to weak customer relationship management, treating customers casually, poor response time and poor quality product/service offering.
- Not scanning the operating environment – small businesses that do not scan the business operating environment, soon become irrelevant or go down, because the operating environment is dynamic, thus, they lose touch with the market.
- Under capitalization – under capitalization leaves a small business prostrate – lost business opportunities, weak revenue generation, inability to plan growth and expansion, inability to face the competition.
- Ignoring Early Warning Signals (EWS) – regular customer complaints, falling revenue, rising operating expenses, growing trade debtors and other receivables, rising account payables and high level of inventory that ties-down cash
Ignoring the Competitive Environment –
- Not knowing your competitors and their strategies
- Absence of innovation and creativity in your marketing efforts
- Ignoring market dynamics and changes in customer needs
- Ignoring the presence of substitute product
Poor attention to statutory, regulatory and tax matters:
- Seeing statutory, regulatory and tax matters as a distraction. This could result in huge sanctions with their attendant costs.
- Delaying the resolution of tax matters with Revenue Service
- Engaging in avoidable litigations
Doing it alone – non usage of Business Development and Support Service Providers (BDSPs).
- MSMEs need the advice/guidance of BDSPs to drive their business. They will help the operators avoid business pot-holes and roadblocks that could lead to business failure
- You need mentoring from successful entrepreneurs
- You need to key into a value-adding business networking
(to be continued)
Young C. Okezie, B.Sc (Hons) MBA, M.Sc, FCA, FCAI, FPAM, FCASIN, MICSB, MNIM, ACTI is the Co-ordinator, PAMDI Centre for Entrepreneurship and Innovation and the CEO/Lead Consultant of Afrique Consulting Limited (MSMEs Business Development and Support Services Providers).