30 December 2019

Why Do Small Businesses Fail?

EVA Financial Solutions


EVA Financial Solutions
Passion is not a substitute for experience.
South Africa Corporate/Commercial Law
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According to statics, 50% of small businesses fail within 24 months of launch. According to research and report by the UWC, between 70% and 80% of small businesses fail with 5 years. This is a significant number of small business that fails. The consequences of this to the economy and unemployment are significant. But what exactly closes doors for small businesses?

Lack of planning:

Most businesses are brought into existence for survival. The business owners simply register a company and hope everything will just be fine. There is no detailed plan on how the business is going to be run. There are no well defined short-term and long-term goals. As a result, there is no understanding of costs, responsibilities, markets, funding needs and other requirements of the business. Before long, the owners of the business run out of steam and find themselves back to the drawing board. Therefore, it is critical for business owners to have a clearly defined plan for their business. Also, a business data room that contains all critical information about the business is essential. This will come in handy when talking to investors or when seeking funding.

One-person show:

In small businesses, often the owner is the go-to person. They are the main source of contact for everything to do with the business. They deal with customers, suppliers, employees, production, admin, dealing shareholders and putting out fires in general. This leaves them with little time to run the important aspects of the business. They have no time allocated for growing the business and attending to strategic issues relating to the business. This is why it is important for business owners to identify, early on in the business, aspects of their businesses that they can handover or delegate to their assistants or other people in the business. This will, in turn, free up their time to focus on what matters.

According to the UWC report, a personal initiative and goal setting are consistently related to business success. In other words, a business owner who is always reacting instead of proactively dealing with issues is more likely to fail than one who proactively deals with issues.

Failure to separate personal and business accounts:

You often hear people say, "This is my business. This is my money. Why can't I get the money out?" We have dealt with one such business before. The owner had a gambling problem. As a result, he spent over a million rands over two years in gambling. None of the winnings would come back to the business and no taxes would be paid over to the authorities for the business. While this business is still there, it consistently had cash flow problems and may not be around for a very long time.

Using a company account as a personal account will no doubt cause a lot of confusion. Business owners will struggle to keep track of their costs and will find it difficult to measure their profitability. Secondly, they will create significant loans accounts in the business, which will be difficult to clear.

As a general rule, business owners should decide on how much they need to survive on a monthly basis and pay themselves a salary from the business, obviously taking into account the cash flow and tax implications of doing so. Secondly, one should not owe the business unless they have a solid plan of paying or reducing this loan in the future.

Lack of proper records and financial systems:

Many small businesses lack proper financial records and systems and technology. This could be related to the fear of the cost or fear of the unknown when it comes to technology. But, many businesses that have adopted cloud accounting and other technologies have achieved efficiencies in a number of areas of their business. This is so because they no longer spend a lot of time on manual processes. Having data in real-time has also improved the way and quality of decision making in many small businesses. For many small businesses, technology should not be seen as a threat but as an ally. Small business should, therefore, be proactively looking for technology solutions before the lack of it throws them out of business.

Late payments by larger businesses:

According to Moneyweb, Kenya is considering making late payment of suppliers a criminal offence. This shows you how big this problem is. In South Africa, many government departments are known for paying way too late. In the Western Cape, the City of Cape Town is in a legal battle with a water supplier they asked to build a desalination plant in the Water Front. The company built the plant with over R37 million of their money, but to date, only about R4 million has been paid.

For any business, cash flow is anything. Small businesses also need to pay their suppliers who may in themselves also be small businesses. So, a call on large companies to pay their suppliers in time should become even louder than it is currently. Government departments should also look at how they can process supplier payments quicker. We also hope the new dawn that is sweeping through the country will also deal with officials who ask for kicks backs from these small businesses.

Passion is not expertise:

Passion is not a substitute for experience. In fact, the experience is a bad teacher. Often one only learns from it after a mistake is already made. So, it is important for small business owners to stay ahead of their game by attending managerial, business management, finance and tax training. Do not wait until it is too late for you to learn. Have an interest in your numbers and finances as much as you do in your money and bank balance.

Poor management:

Ever heard people say, "People do not leave jobs, they leave managers?" When hiring managers, one needs to get someone who has a passion for developing and listening to people. When this is not the case, staff turnover becomes too high, so do the costs of hiring and training new staff members.

Other factors:

  • Limited bargaining power
  • Corruption, where some big entities and government officials ask for kickbacks upfront
  • Lack of systems and processes to handle growth or deal with risk
  • Low margins
  • Failure to attract requisitive skills

September 11, 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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