4 Reasons why Businesses Fail
While
thinking about what to write about today, I decided to focus on why small
businesses
1.
Not understanding the markets
2.
Lack of Business management skills
3.
Cash flow problems
4.
Corruption and lack of trust
5.
Lack of Infrastructure (Energy,
Transportation, etc)
6.
Government policies (Taxes, policy
somersaults etc)
My
list is by no means exhaustive, I just decided to mention these from all that I
was able to gather from my research. You will also notice that I said four reasons
in my title and yet here I am listing six. The last two are key but dependent on Government and since
my focus is on you as an entrepreneur, I will only be discussing the four that you can influence directly.
Not understanding the markets
During my MBA class, I was introduced to the market Vs Product orientation. A market
orientated company is one that organizes its activities, products and services
around the wants and needs of its customers. By contrast, a product-orientated
firm has its primary focus on its product and on the skills, knowledge and
systems that support that product.
Most SMEs start their
business from the product orientation position because they're driven by their
passion or circumstance of life (necessity vs opportunity entrepreneurs). It is
not enough that you like to or know how to do something, you must first
establish if there are enough customers willing and able to pay for it.
To succeed in today's
fast-paced business arena, the SME must be market focused and develop ways and
means to keep abreast of changing consumer needs.
Lack of Business management skills
There is a science to running a business, no matter how small,
once it is rereferred to as a business organization then the owner must
recognize that elements of; marketing and sales, financial management, human
resource management, operations management, succession planning etc. must be
incorporated into the business from Day 1.
I often tell my clients
that the smallest SME is a miniature version of the biggest conglomerate as far
as structure and organization design is concerned. It is always better to start
off on the right path.
Understanding how these different functional areas work together
is what business management skills are all about and how well the business
owner is able to navigate these areas will determine how well the business will
perform over time.
It is also obvious that not many business owners will have these
skills and competencies at the start of their business, there must be a
deliberate attempt to either learn, hire or outsource to ensure that the
business doesn't suffer.
Cash flow problems
This reason is closely tied to the business management skills
above, but I decided to address it separately because of its peculiar nature –
it can be confusing. Not recognizing the difference between, revenue, profit and
cash flow is a major pitfall of many SMEs.
Revenue is what the business earns from the sale of its products
and services. It also includes other sources of inflows like interest, fees,
royalties etc. It is usually stated for a specific period, such as revenue for
a particular month, quarter or year.
Profit is the difference between your revenue and the cost of
producing or providing goods and service.
Assume that your factory business delivered goods worth N10m to a
customer in the month of March and invoiced them. If it cost, you say N8.5m to
produce the goods then we would say that your business earned a revenue of N10m
in March and had a gross profit of N1.5m.
Cash flow measures the actual movement of cash in and out of your
business, via the payment of raw materials, salaries etc. or the receipt of
money from sales etc.
Continuing with our example, assuming that the customer has a
payment circle of 30 days, it means that even though you supplied the goods say
on the first week of March, actual cash will not hit your accounts until the first week of April at the earliest.
Herein lies the problem, on paper your business has earned N10m as
at the first week of March but that money will not be available for your use
until after 30 days, how to sustain the business and keep things moving is the
challenge that if not well managed can kill your business.
A lot can go wrong if not well managed. In our example, the business may approach a lender and ask for a loan of say N3m which is way above
the profit margin of N1.5m.
Corruption and lack of trust
A better title for this should have been the absence of values in
society. The virtues of integrity, fidelity etc. have been bastardized and the
result is the low trust environment that we find ourselves.
Toxic relationships are becoming commonplace with employees
seemingly working at cross purposes with the employers. This situation will not
allow for growth and if not well handled might even lead to the demise of the
firm.
To remedy this situation, the employer must be true of the ethos
of the organization, try their best to only recruit staff for both ability and
value alignment. They must continually train their staff to imbibe these
values.
Conclusion
Not minding these challenges businesses are still thriving in
Nigeria and you too can make it if you will look closely at the areas
highlighted above and determine to address them in your business. Do you think
we have left out a critical reason for failure?
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