There have been many internal reasons linked with the failure of small businesses. One problem, which many small businesses often have, is the lack of capital or funds. Small businesses often have a lack of funds, as large banks like larger businesses and do not back them. The amount of money needed to start up and keep a business running should be known before the company is even set up. Another problem is that small business owners often tend to take out too much money from their business for personal reasons such as holidays or the purchasing of a new car. This is a terrible move by an owner as it shows poor planning and the company is more likely to suffer in the future due to not having enough money. This in turn leads to another cause of failure: not knowing the financial condition of the business. Many SME’s maintain poor books and records for the business. This results in having no conception of profits, costs, margins, sales or customer ratio’s. The business owner is then unable to make intelligent decisions because the lack of this information.
Due to small businesses having a lack of capital they are not able to spend adequate amounts of money on research and development. Research is important as it enables the owner of the business to help to see what may occur with his product or service in the future. This is done by seeing what other similar companies are doing and also to see the publics demand for a product or service. Research and development therefore helps a small business to plan with its finance matters, its growth or expansion and its in staffing when necessary.
Another reason why small businesses fail is that they sometimes ignore or have insufficient understanding of the competition. Most SME’s don’t know their own strengths and weaknesses in terms of their business rivals. This removes the opportunity to gain a stronger position in the market. Previously companies have built up consumer loyalty. This however barely exists anymore. Today, customers go where they can find the best products and services, even if that means breaking off long-term business relationships. In order to be successful a business has to monitor their competitors and not be ashamed to copy their best ideas. Better yet, devote some time each week or month to devising new methods, products or services for the firm.
Contrary to the popular cliché, few products or services “sells themselves”. This is why marketing is very important to small businesses. However many small businesses use sloppy or ineffective marketing. Productive marketing is probably the toughest aspect of operating a business; it is also the least understood. Too many businesses spend too much time polishing the product and too little time creating awareness for it3. It’s a hard lesson to learn: just having a great idea doesn’t create an audience. In a competitive marketplace, a product won’t stand a chance against an inferior, but better marketed, product. Small businesses, with their limited resources, underestimate what it takes to build a market presence. Marketing is an emotionally charged activity. Rarely do you find small business owners eager to receive the negative feedback necessary to reposition their product or service successfully.
Another reason why some SME’s fail is the lack of experience the owner has. The failure rate of small business often has more to do with lack of experience than anything else. Most entrepreneurs see their project as “their little baby”. They don’t want any help from any outside source; this is turn leads to problems and failure. The experience of others is a highly under-used business tool. Experience is the best teacher. You can learn a lot about operating a small business from other successful business owners. This however rarely takes place, as the entrepreneurs don’t want any outside involvement.
In order for an SME to avoid failure, if the owner employs staff, he will need to have good people skills. Failing to develop an orientation system for new employees or to follow through on personnel development will lead to unmotivated and unhappy employees. This in turn will have a massive negative effect on the business. Owners want to gain the maximum out of their employees and in order to do this they need to have good communication with the staff. All owners accept that employees wont give the same dedication and high standard to the job as themselves.4 However having a good rapport with staff increases the chance of achieving the best out of them. Some owners are also unable to swiftly discharge poor performers without fear of favour. This leads to small businesses still paying a wage they perhaps cannot afford and receiving a lower than expected standard of work.
I feel that planning is vital when the success and the failure of a small business is concerned. The examining of the word ‘plan’ brings the subject of finance, staffing, growth, and innovation into the equation. Planning must be done with extreme care in order for a small business to be successful.
Before the owner of a small business does anything, he should consider and plan all of his movements and decisions. An owner has to plan everything from the amount of staff he needs working to the growth and expansion of the business. Many problems arise because of a lack of planning. Some business managers open their company in a helter-skelter fashion. By this I mean they rush into decisions without properly thinking them through and planning them. This leads to another reason why some small businesses fail, not preparing and following a formal Business Plan. Many business owners think that dedication and hard work will pull them through. A global look at the business, frequently updated, is essential to assure success. If the skills are not present to prepare one, no other allocation would be as effective as obtaining professional assistance.
It is both planning before the company is in action and once it is running that can be the difference between the business being a success or a failure.
There are other reasons behind small business failure such as poor location of the business. Even the best restaurant or retail store will fail if its in the wrong place. Some businesses also have a lack of versatility. The company may be great at making boots but that may not be enough. Successful business owners tend to be adept at a number of tasks.
Recently back home in my village three young entrepreneurs opened up a cheese shop right in the centre square of the village. The shop was very small and sold all the different types of cheeses you could imagine. I am friends with one of the owners; from talking to him when they first opened non of them had any business knowledge or experience of any kind in running a business. This was the start of bad things to come. With all of them young, non-homeowners etc it took all three of them to get the loan to start up the business. It seemed like a good idea as there was nothing like this in the area. However due to a lack of planning and inexperience the whole thing went wrong from the start. To start with this little shop had three full time wages to maintain. Could this little shop generate that much profit? It seems not. They did not generate a business plan that stated the expected growth/profit of the business before they went ahead with the plans. They also did not plan on it taking a few weeks for people to hear of the new shop and start visiting, they predicted instant profits, which is a major mistake in any business. Due to lack of funds they did not research enough into the chosen field. He told me they read a cheese book and ordered as many as they thought would fit into the shop. On the first day of opening the shop was full of cheese. However there weren’t many customers. As the days went on the shop became slightly busier, but there was nowhere near the amount of business that was needed. The first week passed and all of a sudden masses of the cheese bought was going out of date. They had not planned for this; they assumed most of the cheese would have been sold. However if they had thought about this they may not have bought as much cheese initially and perhaps just bought a little till they no there expected custom. At this point they should have asked for help from someone with experience, but they seemed too proud to do this. A couple of months past and the shop was still not making a profit. They had to pay the bills themselves, just to keep the business afloat. They had not planned for this and soon found themselves in a whole too deep to dig themselves out of. It was now too late for them to ask for advice and the shop closed down. My advice to my friend was to learn by his mistakes and try again.
It is inevitable that small businesses will carry on failing. Sometimes the reason behind the failure cant be helped. However from reading this essay you should gather that the majority of the times, failure could have been prevented. In fact 82% of the time when businesses fail, the owners really could have done something differently to stop it from happening.
REFERENCES
1 Business Studies by Dave Hall, Rob Jones, Carlo Raffo. Edited by Ian Chambers.(1996)
4 The Business Environment (second edition) by Ian Worthington and Chris Britton. Published 1997 by pitman publishings
JOURNALS USED
¹ Journal of Small Business and Enterprise Development, Vol 9, Issue 1.Learning the hard way: the lessons of owner-managers who have closed their businesses. By David Stokes and Robert Blackburn.
² Journal of Management Development, Vol 13, Issue 7. Managerial Competences in Small Firms. By Graham Martin and Harry Staines.