You will agree with me that there are so many small businesses that have contributed a lot to the growth of the economy. They have created employment opportunities for many families, although some remain small throughout their operational lives.
It is obvious that those who are starting new ventures have goals to achieve. And to mention that each business has its own objectives to achieve, such as maximizing profits and sales, minimizing costs, maintaining a certain level of production and labor, etc.
The failure of a business opportunity is what an entrepreneur does not want to happen. Just as we agree with the fact that there are companies that have been successful, we should also accept the fact that a good number of them have gone bankrupt even within two years of going live.
If aspiring entrepreneurs would address the reasons why small businesses fail, they won’t fall for the same causes of failure. This is because they will be in a position to identify these causes and correct them before it is too late.
Now you may wonder why some companies remain small throughout their operating lives even though some of them make a profit or are able to grow.
4 Reasons Why Small Businesses Stay Small
1.) The owners of these businesses prefer not to expand their businesses. Some sole proprietors don’t want to worry about the challenges of running a large business. They do not want to employ people to help run their businesses, preferring instead to be assisted by family members.
2.) The nature of the product/service the company is involved in does not allow for expansion. There are people who offer products/services that make it difficult for your business to grow.
3.) Lack of capital for expansion. There are small businesses that are viable and have growth potential but lack sufficient capital. These companies are challenged to obtain funds from financial institutions. Lack of capital plays a negative role in hindering the growth of small businesses.
4.) Very low demand. If the business has very low demand for its product or service, then at the end of the fiscal year/business period the business will make no profit, and if it does, it will be very low, so the chances of it expanding are slim. Just to mention, making inadequate profits as a result of very low demand makes it difficult for small businesses to grow.
However, there must be a starting point, and as such, each business starts as a small entity and gradually grows to a medium-sized entity and eventually becomes a large business entity that is either a private limited company or a public limited company. Keep in mind that a partnership company can also grow into a large company.
Reasons Small Businesses Fail
1.) Wrong reasons to start a business: People who start a business for the wrong reasons have not been successful. Just because someone else is making a huge profit in a certain line of business does not mean that you will also make the same amounts of profit as him/her if you start the same business.
2.) Bad business management: When there is poor management of the business, it becomes difficult for said business to be successful in its operations. Finance, marketing, buying and selling, planning, hiring, and managing employees is what most new business owners fail to execute effectively, causing their small businesses to fail.
3.) Lack of compromise: Starting a business requires someone who is committed to ensuring that it succeeds. Neglecting the business will make the business fail. Many small businesses have failed because the owners did not take the time to monitor performance and market them. Some business owners let their businesses be run on their behalf by incompetent people who lack accounting skills and the knowledge of running a business.
4.) Lack of Finance: Small businesses have failed due to lack of proper funding. Some of the owners underestimated the amount of capital required, and as a result of this underestimation, some ended up running out of operating capital, thus putting an end to the operation of their businesses.
There are those who do not have reserves, which has led them to not be able to take care of losses and disasters when they occur, which has led them to go out of business.
5.) Business Over-Expansion: This has led to the failure of many small businesses. This happens when there is a loan of too much money beyond what the business requires to expand the business. Moving into markets that are not profitable is also an expansion of small businesses.
An ideal expansion is one that is driven by customers due to their high demand for products and services, which leads to high sales, whereby the business experiences good cash flow.
6.) Rent: Where the business is located is critical to determining its success. Small businesses have failed because they are located in areas that are not ideal for business. They must be located in accessible, populated areas with demand for their products and services.
7.) Personal use of business money: This is the biggest challenge many small business owners face. They withdraw money intended to operate their businesses to satisfy their personal wants and needs. If they continue to withdraw money from their businesses without paying it back, their businesses will eventually run out of finances, forcing them to end their business operations.
8.) Lack of delegation: Small businesses have failed because the owners did not delegate some of the functions to their employees. They think that if they delegate them, then their employees will not perform these duties as they personally would. When such owners get sick or are out of business, then the operations of some tasks will be paralyzed until they get back to work.
9.) Do not diversify: Small businesses that only have one product/service to offer are prone to failure easily compared to those that have a variety of products/services.
10.) Procrastination and poor time management: Putting off tasks that small business owners find unpleasant to perform has caused small businesses to fail. An example of such tasks includes following debtors into paying their debts (debt collection).
Time management continues to be a challenge for many small business owners. If important tasks like delivering products to customers, purchasing stocks, etc. are not handled at the right time, the business will lose its customers.
The above are not all the reasons why small businesses fail, there are more reasons.