Leadership

Guest Post: Why small businesses fail?

Featured by John Azumah

My featured guest blogger is John Azumah. John is a friend - the annoying kind. He is free, open minded, and a brutally honest person. He works as a Lab Technician with OCP Africa. John wants small businesses and start-ups to succeed and grow, and he believes they can if they make the right decisions and adapt the appropriate strategies. In today’s blog, he tells us why small start-ups or businesses fail, and also how they can succeed?

The definition of a small business is sometimes used interchangeably as ‘SMEs’ (Small and Medium scale Enterprises) and vary among different countries. The Ghana statistical service considers an organization with less than ten employees as a small scale enterprise, whereas the National Board for Small Scale industries (NBSSI) prefers to expand the scope and criteria by accessing the value of the fixed assets (not exceeding a thousand Ghana cedis) of an organization and the number of employees (six to twenty- nine) it employs. Small enterprises or businesses make up to seventy-five (75%) to ninety percent (90%) of the total businesses in Ghana. A story cited in the 18th June, 2018 issue of the B&FT (Business and Financial Times) newspaper quoted the Business Development minister, My Ibrahim Awal Mohammed stating;“only 15 percent of small businesses go beyond three to five years in this country”. Another study also concludes that only forty percent (40%) of Ghanaian businesses survive beyond the first five years of operation (Amoako-Mensah, 2013). It can be concluded from the remarks of both the Minister and the study that majority of small businesses fail after the first year of operation. This failure can be attributed to common reasons like: lack of business or industrial experience, uncontrolled growth, insufficient capital and poor access to credit facilities, personal use of business funds, poor management and inability to compete with established and pre-existing brands and businesses. These factors can lead to common symptoms like high cost of running business and credit problems.

In this blog we would explore these causes and symptoms, and examine the decisions and principles that helped the 15% percent of small businesses to survive. Most successful companies are known to employ staff with experience and skills essential to the delivery of their products and services to their client. Richard Branson, founder of many successful business ventures such as Virgin Atlantic sums the importance of business experience in a beautiful metaphor; “entrepreneurship is like riding a rollercoaster. It can be messy and chaotic. Having business experience can make the whole ride less chaotic and messy.” Although it is possible for entrepreneurs to be successful in a business in which they had little or no prior experience; those with an appreciable amount of experience in same venture tend to have a head start and more likely to succeed in the same venture. They tend to avoid common ‘beginner mistakes’ from experience and create better solutions to address foreseeable challenges. Mark Zuckerburg didn’t randomly come up with the idea for Facebook. He was a talented programmer with at least one previous venture into social networking when he eventually came up with Facebook. A phenomenological study of successful small business owners in Ghana by Michael Tetteh Alimo in 2015 concludes that a business or industrial experience of at least five years is important to running a successful company in Ghana. Likewise a business with inexperienced and unskilled employees, would experience a decline in productivity, lead to slower production times, and increased operation costs.

All businesses require fiscal capital which is vital to run their operations. The amount needed may range from a few hundred Ghana Cedis for small companies to billions of dollars for major corporations. Whereas many big businesses and major corporations have access to unlimited funding and reserves, small businesses do not have the same luxury. According to the World Bank, more than half of formal small businesses do not have access to formal credit. Financial Institutions are less likely to borrow or invest in small businesses because of high risks and in some cases low returns on investments. The few institutions who do, prefer to invest with small business who have a history of good financial management or start-ups with good financial and business plan. Successful businesses have been found to have a suitable and well-structured financial capital that enable them to fund their businesses and be afloat even during periods of slow economic growth. Small businesses with a structured financial plan are more likely to gain access to credit facilities and loans from financial institutions. In Ghanaian context, the sources of funding for most small enterprises are through personal savings, soft loans from family or friends and in some cases money derived from the sale of fixed assets. Although these sources are quick to access, they are not sustainable. Every successful small company need a sustainable form of funding to keep their businesses afloat and possibly expand when the need arises. According to the 1996 issue of The Entrepreneurial Executive volume 1, Start-ups can avoid this problem by attaining adequate funding and keep fixed costs of operations low. A rule of thumb to define adequate is to get the best estimate available of all costs, then double it. As the business begins to earn money, the owner or manager should avoid the temptation to increase the fixed costs of running the business. Good financial record keeping and control can help minimize theft and also developing trust and a strong business relationship with financial institutions can help small business address their funding challenges.

Competition according to businessdictionary.com defines it as a ‘rivalry in every seller tries to get what other sellers are seeking at the same time: sales, profits, and market share by offering the best practicable combination of pride, quality and service’. In order for a small business to stay competitive, it needs to understand and identify other potential rival businesses that provide similar services or products. Aside that, the company must ensure that their products and services are tailored towards the satisfaction of their customers. Regular market survey and innovation of products are key decisions, successful small businesses take to remain competitive. Common factors that Small businesses who fail to take these factors into consideration tend to make low sales, less profit. Mickey Mikitani who is the CEO of Rakuten Inc. identifies four key factors that has helped his company to be competitive and could also be adapted by small business to be competitive:

  1. People. A competitive firm recruits people with the right motivation and the right skills to integrate into the company. It also has a robust system of training and education.
  2. Efficiency. Systems must work perfectly. This is true in all aspects of the business from operations to communications. To be sure we are at our peak efficiency, we must have measures of effectiveness in place at all levels.
  3. Innovation. True innovation is more than just a well-funded R&D department. Innovation is also a cultural imperative. In addition to giving our people the right technology in which to innovate, we must also create a culture throughout the firm that embraces innovation and allows all employees to challenge the status quo and try new things.
  4. Strategy. This must be more than vague goals. Strategy must integrate with the business model and provide a long-term road map for the company.

Thanks Johnny for sharing this wonderful insights with us. And I do hope it helps your business to grow and succeed to higher heights. Live your dreams, and inspire the world.

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