Why business fails The desire of almost every Nigerian is to start up a business that they can control and call their own, no matter how small. Nigerian have always had a knack for entrepreneurship and regard themselves as great entrepreneurs, whether or not that is true is another issue. But we have seen some businesses start with some great enthusiasm and drive and before you know it, Kabob… Many great products have disappeared from shelves and warehouses because the companies that produce them went under. Business failure Is a global phenomenon and cannot be associated with Nigerian lone.
It cannot also be analyzed from one focal point because, just like businesses fail for one reason or another, so do governments, social systems, economic systems and so on. The uprising in the Arab Nations that spread like wild fires and led to the sacking of various governments, the introduction of Book-Harm and senseless bombings In Nigeria, the plunge In global capital market indices, debt situation of the biggest economy In the world and the ripple effects, the Naturalization of three commercial banks in Nigeria, the riots and looting in London, e. . C are all testimonies f failed systems. Business Failure can be examined from the perspective of Size, geography, economy, industry e. T. C. But fundamentally speaking, the reasons are not far-fetched and can be easily recognized. The problem is that most business owners see the problems, either don’t understand them. Or some are even pointed out by consultants, staff, or customers and the owners fail to act until the spiral continues and it is too late.
Some of the reasons like lack of planning, no succession plan, poor record keeping and accounting system, cash flow problems, lack of knowledge about the business, greed, retreating with people of unlike minds, attrition, growing too fast out of control, etc On this forum, I would Like you to join me In looking at some of the common reasons why businesses fail, especially In Nigeria.
Though the fundamentals of business remain the same, I would be using real cases that took place in Nigeria, where most of my audience are drawn from. We would focus our attention on the internal issues rather than the external, internal being those that can be corrected within the organization with minimal disruptions. Please feel free to make your contribution, let us provide solutions…. . Lack of planning: Planning is chalking out future courses of action to be taken.
It is a very important function of entrepreneurship or (management). A lot of entrepreneurs have great Ideas which they develop In their minds and some lead to the production of a great accidentally like that guy that left the cake in the oven for too long and discovered the recipe for cookies, that fellow that created that social networking site that millions of people are addicted to in his dormitory or that college radio station that has now become a global news network.
Whether it is a start up or a business that is in existence presently, a good recipe to make it fail is to have no plan or failing to review the plan to meet present day realities. A business venture needs to keep evolving to survive in a very dynamic and volatile world that we live in today. The strategies of yesterday may not work for today for obvious reasons, as there may have been change in policies of regulators, market shifts, technology, trends, e. T. C depending on the industry the business finds itself in.
All these will affect the overheads positively or negatively, price of the product or service, which will invariably affect the revenue, owe competitive the organization will be in the market place and ultimately continuity. Let us take for instance Meek, who used to trade electronics in Alba and after spending 5 years as an apprentice in the business graduated from being an apprentice to being a Boniface business-man in his own right. He had saved up some money and in addition to what he got as his parting gift from his boss; he had NINE, 000. 0 to start up his own trading business selling electrical accessories….. He paid for a shop with IN 50, 000. 00 and took care of some incidental expenses with NON, 000. 00 which left him with ONION, 000. 0 working capital…. To be continued. Www. Detoxifies. Bloodspot. Com/2011/08/why-more-businesses-are-failing-in. HTML y Samuel Olefin Debbie (BEDS Advisor, DC, Lagos) Introduction There is no uniform definition of what business failure (BE) is. Biopic. Com defines BE as closure or cessation of activity that results in a loss to its creditors.
This means that firms that stop working due to lack of sales or profit, or retirement/death of its principal without leaving any liabilities cannot be classified as a failure. This definition is slightly different from Wisteria’s, which sees BE as cessation of operations following a firm’s inability to make profit or bring in enough revenue to cover its expenses. In other words, a business can be considered as failed when it has run out of cash. Caffeine defines BE simply as an organization that has gone bankrupt or out of business.
From these definitions, it is obvious that lack of profitability alone is not a necessary and sufficient basis to declare a business as failed. Furthermore, it must be borne in mind that any business, regardless of size can fail. The question then arises: why the strong emphasis on, or interest in small business failures? The answer probably lies in the relative ease of entry and exit as well as the strong potentials of small businesses to simultaneously and significantly contribute to economic growth, employment generation, and poverty alleviation.
Before the recent global economic slow (or melt) down, there has been general apprehension about rapid economic growth and simultaneous increase in poverty in many less developed countries, and the general consensus is that a robust small business sector is all that is needed to halt this disturbing trend. In this paper, the historical importance of small businesses is further underlined. This is followed by a as well as the impact of the Nigerian operating environment on the performance of small businesses are also further scrutinized before proposing possible options to redress the incidence of failures.
The paper is concluded with possible policy implications for the Deed’s operations and/or activities. II. The Importance of Small Businesses Micro, small and medium enterprises (Mess), otherwise simply called small (as opposed to large) businesses are generally referred as the engine of growth in many economies. Their importance is usually viewed from the perspective of employment enervation, contributions to export earnings and Gross Domestic Product (GAP). In industrialized countries, Seems are major contributors to private sector employment.
Empirical studies have shown that Seems contribute to over 55% of GAP and over 65% of total employment in high income countries. Seems and informal enterprises, account for over 60% of GAP and over 70% of total employment in low income countries, while they contribute about 70% of GAP and 95% of total employment in middle income countries (COED, 2004). Table I presents some more country-specific statistics, which underlined this commonly reported importance of small businesses n many countries. Why Small Businesses Fail There is a huge and continuously growing literature on this subject.
Michael Gerber (Mar. 2007) listed ten reasons why most businesses fail. These are lack of management systems; lack of vision, purpose, or principles; lack of financial planning and review; over-dependence on specific individuals in the business and poor market segmentation and/or strategy. Others are failure to establish and/or communicate company goals; competition or lack of market knowledge; inadequate capitalization; absence of a standard-quality programmer; and owners concentrating on the chemical, rather than the strategic, work at hand.
All the ten factors are quite evident among Insignia’s small businesses. From a special study on why small businesses fail, Janis Petit (2004) discovered five major factors why more than half of small businesses fail within the first four years. These factors, which are not remarkably different from those on Michael Grabber’s list are under-capitalization/inadequate sales; lack oaf big vision, lack of a clear plan; lack of focus and lack of expertise. Janis particularly stressed the word ‘Big in the visioning process and ‘Clear’ in the planning process.
Many people get it wrong at this stage, confusing ‘Big Vision’ with ‘Starting Big; and ‘Clear Business Plan’ with ‘Bogus Business Plan’. Many small businesses fail because of fundamental shortcomings in their business planning, which ought to be realistic and based on accurate and current information as well as educated projections for the future. In addition to poor management, capital inadequacy and lack of a clear business plan which had already been mentioned, Patricia Schaefer (2006) identified starting a business for wrong reasons, locating the business wrongly, over-expansion and lack of website as killers of small businesses.
She said those who start small businesses solely to make a lot of money, to have time for family, or to avoid answering to anyone may find the businesses coming to grief sooner than later. Instead, she said considerations such as passion, physical fitness/mental stamina to withstand challenges, positive attitude, strong drive/determination, using failure as a important factors. In the words of Patricia, “A successful manager is also a good leader when he creates a work climate that encourages productivity. He or she has a skill at hiring competent people, training them and is able to delegate.
A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future. ” Quoting from the independent works of Michael Ames and Gustavo Berne, the United Small Business Administration (SABA) listed factors such as lack of experience, insufficient capital (money), poor location, poor inventory management, over- investment in fixed assets, poor credit arrangements, personal use of business funds, unexpected growth, competition and low sales as the factors making over 50% of mall businesses in the USA fail in the first five years.
At the risk of repetition, albeit undue emphasis, extracts from the work of Sheila Raw (2009), who blobs at paw(People-to-Work-With)), on why small businesses fail are also worthy of consideration. The absence of a viable market for the product/service, poor capital structure/cash flow crunch, lack of marketing expertise, poor management and being out of touch with customers are, in Sheila’s view, the greatest small business killers. No product/service is worth its while if no one is willing to pay for it or found reasons o buy from a small business as opposed to a corporate giant producing a substitute.
Until a business offers something that the customer values (technically called Value proposition’), chances of survival are quite slim. On the issue of funding, it is fairly common for small business owners to take up too much debt or underestimate capital required to reach cash flow breakable, causing many promising ventures to shut down prematurely. Therefore, unless a small business promoter is conservative with his financial projections and be sure to have adequate funds (or personal paving) to cover all the sunk costs, there will be a great chance of early mortality.
Approaching the issue of business failure from what looks like a maverick approach, James M Hushes (Seine Articles, 2010) says small businesses do not fail for lack of money, fierce economic competition or because of the nature of the operating economy. They fail because the owners think they’re good at what they do, forgetting that there are others doing exactly the same thing. Hushes says he “understands that there’s more to work than simply closing deals and building your client list… But not such more!
Sure, you need to invest your time and money into fulfilling your customers’ orders, you need to actually do the work you set out to do per the contract language, you need to make sure you’re delivering the best customer service you can, you need to make sure your price and the value of the service and goods you’re offering makes sense… But besides that: if you are in business, you’re in sales. You’re in marketing. ” In other words,and as far as Hushes is concerned,the failure of most small businesses can be attributed mainly to weak sales and marketing techniques.
In a very recent work, Susan Ward (2010) said small businesses fail because those who start them fail to: ; do the market research to find out if there’s any genuine market for their product and/or services, ; bother to get the money sorted out before they start the business ; choose a feasible business model plan for growth or what happens if the new business is a success; and ; plan an exit strategy many small business promoters work hard creating small businesses and building them into successful enterprises, but many of these same people have no plan for hat will happen to their successful small business when they’re done.
Since many small businesses are dependent on one person’s talents and personality, then the need for an explicit plan, which goes beyond wishful thinking, is necessary to avoid failure at the exit of the pioneer promoter. Alice Deride (2003) came up with twenty five basic reasons why small businesses fail.
Some of these, which had not gotten any mention in this presentation include fear, procrastination, choosing quantity over quality (or cutting corners), poor follow-ups, wrong spending pattern (too little or too such), cockiness (pride and arrogance) and blame shifting/incessant excuses. Finally, it can be deduced from the work of Simian Fan (2003) that small businesses have some inherent disadvantageous characteristics that will require that they be provided with public supports.
Such characteristics, apart from limited managerial capabilities, include lack of economies of scale, lack of collective voice and influence on policy, frequent cases of market failures and their biases against small businesses, weak financial capacity to undertake R&D or procure other costly support revise such as Business Development Services (BEDS), and huge knowledge gaps (most small business promoters don’t know what they need to know but which they don’t know).
When these public supports are not available, chances of failure can be Some Peculiar Small Business Challenges and Failure in Nigeria very strong. ‘V. The findings of Simian in the last paragraph quite aptly describe the circumstances surrounding the failures as well as dismal performance of small businesses in Nigeria. However, as we found in Table l, small businesses in Nigeria lag behind their underpants in other countries in terms of productivity and in terms of contributions to aggregate economic growth.
As a matter of fact, their contribution to export earnings is negligible, relative to other countries, which implies that there must be additional, albeit country-specific reasons or factors militating against the survival of small businesses in Nigeria. First is the predominance of ‘necessity entrepreneurs over ‘opportunity entrepreneurs. A necessity entrepreneur is that promoter who starts a business because he needs to ‘do something rather than stay idle, whereas n opportunity entrepreneur embarks on a business to take advantage of identified market opportunities.
Whereas a necessity entrepreneur will buckle and fall (albeit fail) at the slightest threat, an opportunity entrepreneur will always be concerned about how to maintain or expand market share. The absence of a well thought-out programmer of converting necessity to opportunity entrepreneurs in Nigeria is one of the reasons for poorer small business performance (and therefore possible higher failure rate) in Nigeria. Closely related to this first point is the distorted and corrupted value system in Nigeria. In a normal business cycle, there will be an initial gestation period, when no income accrues.
This will be followed by the commencement of inflow, which may fall below outflow (or expenses) until the break- even point is reached. Then profit will start to grow on an incremental basis until the growing business matures. Where the entrepreneur is constantly innovating, the point of maturity may be delayed or prolonged. Along the way, the entrepreneur is called to bear some pains or face some challenges. While the serious ones will, with exit into ‘quick-fix’ options, leading to the death of the original business.
This is one major reason for small business failure in Nigeria – the tendency to run businesses half-heartedly because there are other fast, alternative, means of ‘making money. A corrupt value system, coupled with weak operating capacity in terms of skills, knowledge and right attitude, constitute major killers of small businesses in Nigeria. The third major point is the dismal state of infrastructure, with particular reference to power supply, transportation and workspace. The available power supply is too low, and its transmission and distribution dismal. Table II brings Nigeria in sharp contrast with other countries.
