Why do small businesses fail?
Not long ago I was scanning business articles to keep up to date with current matters in the financial world. There were two commentaries that were probably missed by many people due to the overload of news from elections in the USA, Brexit and general financial news. One commentary was about the premise that with low or negative interest rates, the corner pillars of capitalism and entrepreneurship were under threat and how would small businesses manage their current activities and longer term strategic planning – if some small businesses actually have the capacity to do this. The other commentary was about sovereign debt that is about to rear its ‘ugly head’ again soon and what the impact may be on selected economies and business in general.
Both articles reminded me of a conversation held sometime ago with a bank manager while I was running my own travel business. It was about small business planning for what we now call ‘start ups’. The gist of the conversation was that despite banking support and tools to assist would be entrepreneurs, many don’t get past first base. The reasons are numerous, ranging from credit risk, a business plan that wasn’t stitched together where ideas, income projections and costs had no relationship with the grand idea and one that was quite disconcerting – no experience in the chosen field for the new venture. Owning restaurants, pubs and bars were a hot favourite in choice and also one that is notorious to fail after a few years. Anyone who has worked in the hospitality, travel and tourism industry know that it is about long hours and much of it with behind the scenes activity and not what is seen on the public stage. Never the less, it has its rewards and needs people with certain skills to mange the customer.
So, why do small businesses fail? There is much research out there. Some supporting each other and some that is perhaps more academic, but still has a practical dimension. Each country has its own legal and regulatory environment and factors including culture that influence business success and failures. In the UK Experian estimates seven out of ten survive at least two years and by five years only half have survived.
Compiled from different sources, here are the common themes in business failure:
· Lack of experience/ started for the wrong reason often based on money or more free time
· Lack in understanding the detail in behaviour/profile of the target market/segment
· Poor management
· Insufficient capital: below £40K increases risks of failure
· Poor location in relation to business activity/sector
· Over investment in fixed assets as opposed to ‘lean’ investment strategies
· Lack of Planning in business growth and cash flow
· Overexpansion or unexpected expansion causing resource and cash flow issues
· No digital presence
Academic research has indicated lack of innovation and product development curtails the longevity. Research based on Swedish start-ups, indicated that business planning interferes with the development and offered little advantage since founders focus on planning and not further innovation. The research concluded ‘planning’ as an activity actually promoted innovation, not hinder it.
And success? We’ll that’s down to passion and persistence with ‘learning’ as the business develops by adjusting plans, strategies and entrepreneurial behaviour. But, don’t forget - negative interest rates threatens the very essence of capitalism.
This article was written by Julian Hoseason.