Top 12 Reasons For SME Business Failure – Part 2.
Last week I explored the first 6 most common reasons for SME business failure. This week I delve into the next 6 top reasons for SME business failure.
Lacking The Cash To Grow The Business To Reach Critical Mass
We should all be familiar with the term “economies of scale”. This is where the business gets to a stage when it does a sufficient amount of business to attract cost savings based on volume. However, before it reaches this stage, it must get beyond the stage where cash coming in is very finely balanced against cash going out.
All good businesses watch their cash position. But what if the business’s lack of cash is preventing it from availing of special deals that can increase profitability? What if lack of cash is restricting the business’s ability to make sales on credit? What happens if the speed of collecting receivables is so slow that the business cannot pay its suppliers within agreed terms? Or what if it can no longer afford to buy sufficient inventory to satisfy demand from its customers?
All of these issues can cause a business to crash and burn. So how does a business combat this, particularly if there is no capital available from the owners to smooth out the bumps in the road? The first place to start is with seeking a working capital facility from a bank or finance company. Even when overdrafts are not readily available, SMB’s may still be able to avail of Invoice Discounting or Factoring facilities based on its receivables. This can quickly release cash into the business of up to 70% or 80% of receivables.
Another alternative may be to negotiate better terms with suppliers so that the number of credit days the business receives is greater than the number of credit days it grants its own customers. Tightly managing credit control in the business can also accelerate the speed with which cash moves through the business. And if all of these tactics together don’t work, there is always the opportunity to seek outside investment into the business from discerning investors, provided that the underlying business is sound and can offer a decent financial return to the investors.
Lack Of Scalability Of The Business Model
In every business, there is a level at which it is economically viable to continue trading. Fall short of this level for any period of time and the business will fail. However, many businesses grow to a certain level and then simply stagnate. The business gets by with a reasonable level of profitability and can manage to sustain itself within existing resources. To get to the next stage of development, a significant investment might be required.
However, with some businesses even investing in infrastructure, process and people may not be enough to break through the existing capacity ceiling. For example, if the business is heavily dependent on a single individual or a few key people, the business will not scale easily or at all. Similarly, if the work force is highly skilled and the business is built on the craftsmanship of the employees, it may be difficult to quickly replicate this with new hires or machines. New processes may be impossible to introduce to replicate these skills.
When we see this lack of scalability within our client businesses, we need to be able to show them why it is folly to try to grow to a new level of business. To pursue unsustainable growth, with a business model that is restrictive, frequently leads to business failure.
Insufficient Awareness Of Competition
Competition is no longer just local for most businesses, unless they are running a bar, a restaurant or a shop. Business is now truly international and when we shop online we don’t often care where the products come from, just so long as they meet our requirements and can be bought at the best possible price. This means that business owners need to spend more time analyzing their competition and understanding the competitive threats posed by new entrants in their markets, high quality substitutes, and new product categories that could wipe out their core business.
It also means looking beyond local or domestic competition. The business owner needs to be proactive in identifying whom he is competing with right now, as well as whom he may be competing with in the future. Get it wrong and he risks going out of business.
Not Talking To Customers Enough
When a business is really small, it is common for the business owner to know his customers really well. Frequent conversations with customers may reveal market intelligence about competitor activities or reveal a market need that is not currently being met. When businesses grow larger, it is imperative to keep the dialogue going in just the same way so that you can anticipate customer needs and be ready to satisfy them with your product offerings. If you don’t talk to your customers, it is unlikely that you can continuously meet their needs.
Similarly, if you are launching a new business or product, you must have lots of dialogue with existing and potential customers. All products must satisfy an unmet need of your customers. Never build a product based on your gut feeling that it has to be the next big thing. Your customers need to tell you unequivocally that they not only want the product that you propose to bring to market, but that they are willing to pay the price you hope to sell it for. Don’t make the mistake of just talking with a small number of customers, talk with them all if you can.
Creating a product in a vacuum, without direct feedback from customers in your target market, will quickly lead to business failure.
Without some form of marketing, potential customers for your products may be totally unaware that you have something to offer that will meet their needs or fulfill a desire for them. You need to be aware that marketing is changing and that you need to optimize your marketing message for the channel that best serves your customers. In 2015, digital marketing represented 28% of the total spend on advertising in the United States. At $52.8 billion, this was nearly $30 billion behind TV advertising. Spending on print media was about 15% of total advertising spend at $28 billion.
You need to have clarity around your value proposition before considering how to market your products. Choosing the correct message for your market comes next. Then you must choose the correct channel or media for your product set. Doing nothing is not an option, if you want your business to survive and thrive.
Pricing Or Cost Issues That Make The Business Uncompetitive
This particular issue is so fundamental that it often gets ignored. If you cannot make money from your business it will quickly run out of cash and proceed quickly into the wall. Adequate gross and net margins are an absolute requirement when running a business. Be cognizant of the typical margins earned in your industry or industry segment and ensure that you are not alone with tiny unsustainable margins.
Topline profitability will determine if your pricing is right or not and bottom line profitability will determine if your overheads are out of kilter or not. Remember, every successful business must generate a financial return that rewards the risk takers for investing their capital in the business. If you can get a higher return by putting your money into low risks bonds or treasuries, then you need to sell your business and invest your cash there instead.
This concludes this article on the top twelve reasons for SME business failure. Remember, these are a selection of the most common reasons for failure and that there are lots of other reasons why businesses fail. Other reasons range from growing too fast to not growing at all, or having an unsustainable level of debt that cannot be serviced or not being able to borrow at all.