Top 12 Reasons Why SME Businesses Fail – Part 1.

As business consultants, we all see the same mistakes being made by clients again and again. I have referenced the top one dozen reasons for business failure of small and medium businesses in another article. In fact between 80% and 90% of start-up businesses fail. Today, I am delving into the root causes of business failure a little bit further. In this article, I feature the first 6 reasons for business failure and next week I will delve into the other 6.

The top one dozen reasons for failure are shown below:

  • Poor management
  • Lack of market need for a product
  • Insufficient capital from the outset
  • Poor planning
  • Not hiring the right people
  • Poor business processes
  • Lacking the cash to grow the business to reach critical mass
  • Lack of scalability of the business model
  • Insufficient awareness of competition
  • Not talking to customers enough
  • Poor marketing
  • Pricing or cost issues that make the business uncompetitive

Let us take a look at each reason for failure in a little bit more detail.

Poor Management

This is the number one reason for business failure, representing about 42% of all business collapses. Lots of entrepreneurs may have a great product idea, a strong ability to sell, fantastic technical skills, sufficient capital to prime the pump, or perhaps great business connections. Any one of these attributes might be sufficient to give a new business a good chance of success.

However, what seems to happen most of the time is that a business promoter may have a strong pedigree in any one, or just a few of those areas, but he fails to grasp the importance of having some degree of proficiency in the other skills, or at least somebody on his team that has that proficiency, and therefore he is unable to make the right management decisions to ensure that the business is successful. The consequences of making seat-of-the-pants decisions, without the knowledge or skills required, inevitably leads to business failure.

Lack Of Market Need For A Product

It is not enough to have a brain wave about what will be the next big thing and then convince yourself that everybody will want it. Proper market research is required to discover if there really is a need for the product and that people will actually buy it at the price point you have in mind. There is only one way to do this. You must talk to customers – not just to a few but to hundreds and perhaps to thousands of them. Even though you talk to the potential customers, you must filter their responses and ensure that they are not just telling you what you want to hear.

Guinness came out with a lighter version of their famous beverage in 1979. It was called Guinness Light. Executives had convinced themselves that female drinkers in particular would welcome this new version of Guinness. They didn’t and the product was a complete flop and was eventually taken off the market. The lesson here is that even the big guys make mistakes but they can still survive. Unfortunately entrepreneurial start-ups will not weather the storm when they launch products that nobody wants and business failure quickly follows.

Insufficient Capital From The Outset

This is a classical problem for start-ups and smaller businesses wherein the owners beg and borrow to raise sufficient capital to get their business off the ground. The problem is that setting up and maintaining a business is a costly exercise and without sufficient cash flow, the business is always at risk of failure. To get beyond the initial trading period and to convert sales into cash takes time. In the meantime, all the overheads need to be paid.

The real problems arrive when you try to grow the business without sufficient capital, particularly if you are making sales on credit to customers. In this situation, you are funding all of the inventory and receivables as well as all of the overheads, and a slowdown in receivables collection or demands for quick payment by suppliers will quickly eat up all the cash and force the business to close.

Poor Planning

Business planning does not have to be an exercise in scripting a book with every single play described within it. However, it should not be done on the back of an envelope either. A one-page business plan can actually be put together fairly quickly, by using templates like the “Business Model Canvas” or the “Lean Canvas”. These templates prompt the owner manager to focus on just 9 variables that need to be examined and only require a few bullet points to be entered per category. It is quick, useful and extremely beneficial.

Growing and sustaining a business requires thoughtful planning. The problem is that some businesses don’t plan at all and simply react to circumstances that present themselves each and every day. This is a recipe for disaster and it frequently leads to business failure.

Not Hiring The Right People

Moving from a sole trader to a business with employees is a big step. It gives the business a better chance of growing and succeeding but it also comes with its own risks. You need to know exactly why you are hiring employees and you must have clarity around what you need them to do when you hire them. Each employee must contribute positively to the bottom line and not simply be added overhead for the business.

Hiring the right people takes some skill. Getting “A” players on your team can significantly boost the business’s success. Hiring “C or D” players can increase the speed with which the business nosedives into the ground.

Poor Business Processes

Although not always obvious to business owners, poor processes and procedures can make it very expensive to operate a business. Manual and repetitive processes can often be automated and poor business processes can be changed. For example, if the accounts department fails to get invoices and statements out within a day or two of month end, this can have a disastrous effect on cash flow. Similarly, if mistakes on invoices are frequent and a lot of time is spent resolving invoicing mistakes, then this will also impact the speed with which the business will get paid by its customers.

In the above example, there is not just a cash flow effect, there is also a significant inefficiency built into the system that ties up employee time unnecessarily.

Watch out for the next 6 reasons for business failure next week.

Niall Strickland