Over 85% of small businesses fail within the first 5 years of setting them up. The simple reason behind this high rate of small business failure is the fact many entrepreneur do not know how to manage small businesses without stress.
Before you start developing that brilliant idea of yours into a small business, it is important that you discover how to manage small businesses for sustained result. The reason why many people fail is not because their business idea is not credible but because they simply did not bother to learn the fundamentals of successfully managing a small business.
There is a great difference between having good business idea and having the managerial skill needed to groom the small fragile business into a successful business.
SIX (6) REASONS WHY SMALL BUSINESSES FAIL
Most small businesses employ people that are not suitably qualified: the most common mistake made by small entity owners is that they employ the service of friends and relations in sensitive positions even when they are not suitable for that position. An uncle of mine who run a clothing line small company employed my younger brother who has no training in accounting to be his bookkeeper. This decision nearly backfired before my brother was relieved of his accounting job.
Some small businesses attempts to grow too quickly: in as much as growth is good in business, there is always a danger of overtrading when a company grows too quickly. Small businesses should focus on profitability and organic growth for some time before seeking ambitious quantum leap. Good working capital management technique entails striking a balance between liquidity and profitability, and this where majority of small business gets it wrong.
Many small businesses have little or inadequate planning: many strategists agree that the importance of planning, in the overall long term sustainable success of small companies cannot not be successfully challenged. Many entrepreneurs tend to adopt the free wheelers style of management where it is considered a waste of resources to have a formal plan in place due to some of the shortcomings of planning. Notwithstanding some weaknesses of planning, lack of it still account for greater portion of failed companies in their early stage.
Lack of governance: although no legislation require owners run businesses to comply with the suggestions of best practices code like the UK combined code, lack of best corporate governance practice has cost many businesses more than they actually bargained for. The lack of segregation of duties in many small businesses due to the small number of staff members in their payroll have given room for irregularities and frauds that will eventually lead to misappropriation of assets.
Lack of basic financial intelligence by entrepreneurs: it is often argued that education does not guarantee success. But, many fail to understand that literacy though similar is not the same as education. You might have PhD in Accounting and still lack the required financial intelligence that will help you run your business. One of the required skills of entrepreneurship is having the financial intelligence to read between the lines of a company’s financial statement. The busy schedule of entrepreneurs have made online accounting degree program popular amongst them.
Use of the wrong business process tools: you don’t expect to be successful if you fail to employ the right kinds of tools in your business. A lot of small businesses for example still have not recognised the importance of using good accounting software. Many of them rely on the use of free accounting software.
Well, there is nothing wrong with you getting free accounting software. The only danger is that many people do not know how to assess accounting software and this often result in deploying all sorts of financial software the wont be compatible with the company’s business and objectives.
Ok, now that we have identified the reasons why small businesses fail, what next? Well, to be successful in running your small business, you need to avoid being affected by these factors that causes business failure.
SUCCESS FACTORS FOR SMALL BUSINESSES
Identifying the right market: the very first thing needs to be done is to identify the market segment that you want to satisfy their needs. You possibly cannot satisfy all the needs of the market segment that you have chosen to satisfy.
Make sure you chose the right strategic direction for your business: the second most important decision that the management of a business must make is to determine what strategic option is most suitable for the business should follow. A business can either chose to be a cost leader or a differentiator.
Exploiting core competence: identifying and utilising a company’s potential to the fullest is a difficult but essential aspect of small business management that cannot be overlooked. Your core competence is that thing that is unique to the organization and that cannot be copied by your competitors.
Continuous improvement: many entrepreneur especially the young ones easily get carried away immediately they see the business beginning to boom. They forget that the law of stagnancy is always there watching. Once the initial momentum is lost, it is usually extremely difficult to gather that momentum again. The secret to succeeding as a small business owner is to keep innovating. Don’t give room for complacency.
Keeping operating cost low: in as much as small businesses do not have the capacity to benefit from the economies of scale; there are still ways that money can be saved. Smaller businesses can save money by ensuring that processes does not have to be reworked, that is, ensuring quality in every process. After all, quality saves money. Ideally, a small business budget should be prepared as a guide to avoid over running costs.