Let us ask ourselves ‘why do businesses fail?’ It is sometimes a very difficult question to answer, especially in our rabid superstitious society, therefore, one of the least understood aspects of entrepreneurship is why small businesses fail.
As a small business consultant, I have had contacts with many small businesses formally and informally. Most of them seem to look in the wrong direction when they have problems with their businesses. In any case, if the business owners knew what they were doing wrong, they probably would have been able to correct it.
In many cases, customers or former customers know why things were not working. Let me give you an example. Recently, I slept in a University Guest House around Wuse 2, Abuja. Everything seemed to be okay except that even when you asked for the simplest meal for dinner it took about two hours for the chefs to get it ready. You would think they just went to the market to buy the ingredients. While checking out, the front office manager asked if I would love to patronise their guest house again and I answered a categorical ‘no,’ and I told him about the food service problem.
In a very good situation, heads should roll in that system, but then are they fully aware of the magnitude of this problem? The following are 10 reasons why a business may fail to even start up or fail to survive:
Stiff competition
Be it product or service, it is important that you sell your product at a price that will produce profit for the business. As a small business or a start-up, competing against well-established products or services can land you in trouble. The meaning of this is that you ought to do your feasibility study very well. It is like the Biblical analogy of wanting to build a house without counting the costs.
Be it product or service, it is important that you sell your product at a price that will produce profit for the business. As a small business or a start-up, competing against well-established products or services can land you in trouble. The meaning of this is that you ought to do your feasibility study very well. It is like the Biblical analogy of wanting to build a house without counting the costs.
Stubborn entrepreneurs
Some entrepreneurs can be very stubborn or may just be averse to taking any serious risks. It is either they are some kind of perfectionists, greedy, self-righteous, paranoid, indignant or insecure. Even when you tell them the mistakes and they very well understand what you are saying, they still keep on making the same mistakes over and over.
Some entrepreneurs can be very stubborn or may just be averse to taking any serious risks. It is either they are some kind of perfectionists, greedy, self-righteous, paranoid, indignant or insecure. Even when you tell them the mistakes and they very well understand what you are saying, they still keep on making the same mistakes over and over.
Out-of-control growth
This one may be the saddest of all reasons for failure. It has to do with a successful business that is ruined by over-expansion. This will include moving into markets that are not as profitable, experiencing growing pains that damage the business, or borrowing too much money in an attempt to keep growth at a particular rate. That is why it is sometimes said that “small is beautiful.”
This one may be the saddest of all reasons for failure. It has to do with a successful business that is ruined by over-expansion. This will include moving into markets that are not as profitable, experiencing growing pains that damage the business, or borrowing too much money in an attempt to keep growth at a particular rate. That is why it is sometimes said that “small is beautiful.”
Poor accounting
You cannot be in control of a business if you don’t know what is going on with the finances. Somebody may have been living big on your money, buying ‘aso-ebi’ and throwing expansive parties, and you will think that you are making profits.
You cannot be in control of a business if you don’t know what is going on with the finances. Somebody may have been living big on your money, buying ‘aso-ebi’ and throwing expansive parties, and you will think that you are making profits.
With bad numbers or no numbers, a company is flying blind, and this happens all of the time. Why? The verdict is that if you cannot afford to hire somebody on a permanent basis to look after your finances then you must do it yourself.
Lack of a cash cushion
A small business’ finance can get into a stressful condition at any time. It may be caused by the loss of an important customer or a very critical employee, the arrival on the scene of a very strong competitor or a law suit. The worst of it is if a recession suddenly sets in. These things can stress the finances of a company. But if that company is already out of cash (and borrowing potential), it may not be able to recover. This is one reason why Yorubas tell you that ‘it is not good to eat with your 10 fingers.’ The important lesson is to learn saving for the rainy day.
A small business’ finance can get into a stressful condition at any time. It may be caused by the loss of an important customer or a very critical employee, the arrival on the scene of a very strong competitor or a law suit. The worst of it is if a recession suddenly sets in. These things can stress the finances of a company. But if that company is already out of cash (and borrowing potential), it may not be able to recover. This is one reason why Yorubas tell you that ‘it is not good to eat with your 10 fingers.’ The important lesson is to learn saving for the rainy day.
Operational mediocrity
Nobody will describe himself or herself and the business as mediocre. However awful the business set up is vis-à-vis current and modern practices, the business owner will still see it as a normal business.
Nobody will describe himself or herself and the business as mediocre. However awful the business set up is vis-à-vis current and modern practices, the business owner will still see it as a normal business.
In 1997, when I was working with a training institution, we were out to market trainings on Technology Management. We got to this factory in Oregun and met the secretary/personal assistant to the chief executive banging it out on an Olympia type writer. So, we did not bother to market the training programme to them. Repeat and referral business is critical for most businesses, and hardly does anybody do that for a mediocre set up.
Operational inefficiencies
You must work out your expenses and match it against your income and profitability. Paying too much for rent, labour and materials cannot be to your best advantage. Now more than ever the lean companies are at an advantage. Not having the tenacity or stomach to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.
You must work out your expenses and match it against your income and profitability. Paying too much for rent, labour and materials cannot be to your best advantage. Now more than ever the lean companies are at an advantage. Not having the tenacity or stomach to negotiate terms that are reflective of today’s economy may leave a company uncompetitive.
Dysfunctional management
This is a business that lacks focus, vision, planning, standards and everything else that lacks good management, one that throws in fighting partners or unhappy relatives into the mix and all you have is disaster.
This is a business that lacks focus, vision, planning, standards and everything else that lacks good management, one that throws in fighting partners or unhappy relatives into the mix and all you have is disaster.
This is particularly true of family-owned businesses. Many years ago as an advanced level student in Ikare Akoko, Ondo State, there was a huge three storey building opposite our school where those not quartered on the campus stayed. The owner of the house had died leaving behind several children who were not in any way coordinated. This was not the days of ‘two years rent in advance,’ the maximum then was just three months. After the first three months, most of the students lived in the house for free for the next two years because renting out the apartments and collecting the rents was dysfunctional.
Lack of a succession plan
Reasons many family businesses do not make it to the next generation is that many work as if they will live forever or that they have all that it takes. It is important to think of who is good enough to take charge in your absence.
Reasons many family businesses do not make it to the next generation is that many work as if they will live forever or that they have all that it takes. It is important to think of who is good enough to take charge in your absence.
A declining market
Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars. The import of the above is that you may have all that it takes but changes in technology and strategies by bigger companies can cause a decline in your market.
Book stores, music stores, printing businesses and many others are dealing with changes in technology, consumer demand, and competition from huge companies with more buying power and advertising dollars. The import of the above is that you may have all that it takes but changes in technology and strategies by bigger companies can cause a decline in your market.
According to Jay Goltz, an entrepreneur with five businesses in Chicago, USA, “in life, you may have forgiven friends and relatives, but entrepreneurship is rarely forgiving. Eventually, everything shows up in the soup. If people don’t like the soup, employees stop working for you, and customers stop doing business with you.” And this is why businesses fail.
