The main reason why small businesses fail With so many enterprises appearing and disappearing in the plethora of a marketplace, we have to ask why some entrepreneurs and small businesses fail, while others prosper. An entrepreneur is defined as, a person who undertakes a wealth-creating and value-adding process through developing ideas, assembling resources and making things happen. It is a well-established fact that small and medium enterprises (SMEs) are engines of economic growth since they create between 65% and 70% of new jobs in the economy annually. The importance of small and medium enterprises (SMEs) The National Treasury regards small to medium enterprises as essential for efficient markets and ensuring sound competitiveness. SMEs are profoundly essential for both urban and rural areas, and are particularly useful for alleviating poverty. Unfortunately, a large amount of small businesses fail within their first two years of operation. Even more worrying is the fact that many more fail within their first five years. Research by students currently undertaking their Masters at Cranefield College found that the reason why small businesses fail is because of deficiencies in management and leadership. These findings should indicate the importance of education and training to ensure that more enterprises succeed and less small businesses fail. Why SMEs fail without proper management It must be remembered that a business is about people and, in particular, management, directing, motivation and nurturing of both entrepreneurs and their staff.
Todays small to medium enterprises operate in an external environment that is increasingly volatile. This means that SMEs have to continuously adapt to the rapid changes that occur in technology, customer needs and market conditions. The research shows that the reason why small businesses fail is mainly a result of poor management planning. This is particularly true in the start-up phase of small businesses where many entrepreneurs fail to develop an effective initial business plan. Good initial business planning is essential to ensure that the entrepreneur and employees of the business are focused on achieving the same goals. A possible reason why small businesses fail It must always be kept in mind that starting a business is a project. The reason why small businesses fail is because projects are not properly conceptualised, designed, implemented and operated. Entrepreneurs who start businesses need to have a sound knowledge of how to navigate the entrepreneurial project. This includes first constructing the business plan and then operating the established deliverable, which is the business itself. The most common reason why small businesses fail is because the entrepreneur started the venture as a result of being unemployed. This means they are essentially starting a business with a shortage of funding.
Cash flow is often cited as a major reason why small businesses fail. SMEs are often guilty of being overly focused on the production of the products or services, and less focused on the actual selling thereof. How to avoid SME failure in the early years The research found that having effective business plans and executing the entrepreneurial project properly can assist businesses a great deal in the first two to five years of existence, and throughout their lifespan. To mitigate the above problems and assess in depth why small businesses fail, Cranefield College offers two short courses. The short courses cover Entrepreneurship and how to navigate the Entrepreneurial Project from an idea to reality. Interested in taking this course? Visit
today for more information on career-shifting project management short courses. Without a cohesive team, your business will not perform to the best of their ability. Get the low down on. Become part of a network of influential Thought Leaders and keep abreast of the latest business news by. P Leadership and go hand in hand. Become the catalyst of change in your business. A large percentage of new businesses in South Africa fail. This could be in the order of anywhere between 30 and 50%. Another large percentage of small businesses donвt achieve their full potential and the three main reasons for this can be summarised as a lack of information, red tape and a lack of financial management skills. 1.
Access to finance Many start-ups rely on financial support from family and friends. However, as many business owners have not planned correctly, they often find that the money they need to start and subsidise the business is not enough. Costly trial and error in the use of capital often results in business failure. 2. Poor planning Many potential entrepreneurs have no formal business training, and tend to ignore the vital step of developing a business plan. As a result they do not have a realistic grasp on the costs, responsibilities and medium- to long-term requirements of a business. 3. A lack of financial expertise Many entrants do not understand the financial requirements of a business or the VAT, tax, costing, financial controls and other obligations that are part of the business mix. 4. Poor stock and cash flow management The link between stock on the shelves and the costs attached to having too much, too little or incorrect stock on hand is not appreciated as proper controls do not exist. Poor calculation of margins and cash flow often lead to crippling pressures impacting on the business. 5. Failure to differentiate between company and personal accounts Using the company account as a personal account leads to confusion regarding the true costs and profitability of the business. This is further complicated by poor record keeping.