Why Do Small Businesses Fail?

More and more people are considering starting their own business. By opening a business there could be a large profit to be made. However, there are losses may occur as well. Some peoples argued that starting a business in a field that they know well would not fail. Knowing if starting a business at all is what most small businesses fail to consider. According to an SBA Study done in 2005, “About 1/3 of Small Businesses fail in the first 2 years, and just over half fail within 4 years.” These statistics are depressing for people looking to start up a new venture. SMEs in successful business networks can generate up to 50% more in gross revenues than firms that work in solitude. However, the most significant reason for this high failure rate is the inability of SMEs to make adequate use of essential business and management practices. Although failures cannot be completely avoided in a free enterprise system, the failure rate could be reduced if some of its causes are recognized and preventive action is taken. It is important that small business owners evaluate if they are compatible with entrepreneurship in order to prevent from being part of the failure statistics.

Small Businesses Fail

Why some businesses fail and why some succeed is a matter of debate, although there are some common mistakes that can sink a business in no time. One key area that small business owners often overlook is the importance of planning. It found that management skills could ensure that small and medium-sized enterprises are better prepared to compete in domestic and international. It is required to know what kinds of planning you should do before starting a small business. It includes unplanned financial management and unplanned marketing research. The results of failure are many; however, no one is concerned about it. Therefore, the purpose of the article is to discuss the significant reason why small businesses fail.

1. Poor Business Planning

Small businesses often face a variety of problems according to their size. Poor planning is responsible for most business failures. The single largest barrier to succession can be identified as those who do not have a succession plan. People work hard to turn small businesses into successful enterprises. However, they have no plan for what will be happened to their business. The cause of bankruptcy often a result of poor planning rather than economic conditions. Most of the business owners who do not have succession plans indicated that it is too early to plan. However, professional advisers indicated it is never too early to start planning. In contrast, it is a barrier to overcome if succession occurs over a short period of time. It is inadequate time for the business owner to plan and execute.

Another reason why small businesses fail is poor planning of both finances and future growth. Some business owners often lack the necessary start-up funds and cannot come up with adequate financing. Business owners have to arrange adequate money on hand to cover all their financial needs of the business before starting their small business. Also, it is required to calculate how much money needs to carry out daily living expenses and how much money is required to run your business. Furthermore, some of them have no cash and expect either a bank to provide financing. They wrongly assume the banks will provide them with financing based only on their good ideas. But in most instances, the banks would not take into consideration as it reflects poorly the person’s ability to manage finances if has no cash. And also, owners cannot ignore the demands of the new ventures. Many business owners do not know what they need to know and lack the capital to hire experienced business advisors.

2. Poor Financial Management

Small business financial management is a vital aspect of growing a company. Small-business owners live and die for cash flow. The most important thing is the monitoring of working capital. This includes accounts receivables, accounts payable, and especially cash on hand. Once lack of adequate working capital would affect the particular business. When business is going really well with cash coming in, small business owners tend not to prepare for the next round of business. And cash flow problems occur. Cash flow is a basic measure of a firm’s ability to maintain sufficient funding to pay off its current liabilities. The owner should know the company’s bottom line and make good decisions. They should take control of finances by coming up with a budget before purchasing or investing. In order to avoid overspending and hence invest effectively, the small business owner should stabilize their cash flow. This approach can ease a cash crunch, it also can increase the value of the business.

Most business owners raise capital from banks. However, early-stage capital is often the most difficult to raise. In fact, it is difficult to raise the capital required in order to properly launch and sustain a business. It will be a high cost even if the capital is available. It is crucial for a new business to maintain sufficient resources especially the capital because, without proper financing, a new enterprise may find it difficult to compete with the competition. The owners have to know how banks approve loans before submitting an application. Financial advisors can help in this situation.

3. Lack of Entrepreneurial Skills

Most of the peoples think that all it takes to run a business is money. That is not true. You could be an excellent salesperson but lack the skills to handle the seemingly mundane day-to-day skills needed to keep a business running. Entrepreneurs won’t make money if can’t sell products. Mostly during the startup phase of a new business, a lack of entrepreneurial skills in an owner can cause a business to fail. This may not be true during the later growth and maturity periods of business where more administrative and management skills are required.

A small firm’s performance outcome is a function of many variables, including individual owner characteristics, owner behaviors, and environmental influences. Entrepreneurs generally have a high need for achievement and social awareness, and they are high-risk-takers. Consequently, the personal and personality characteristics of an owner can be a cause of business failure.

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