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Why Most Small Businesses Fail And How To Avoid It

Why most small businesses fail and what to do to avoid it
Most small business failures are caused by the personal mistakes or shortcomings of the entrepreneur (the owner of the business) himself. Research has shown that about 25% of all business failures are due to "management issues", and as much as 90% of small businesses fail because of incompetent managers. The would-be entrepreneur should be aware of and do all that is necessary to avoid the following common mistakes of entrepreneurship.


1. Management Mistakes 

In most businesses, poor management is the primary cause of business failure.Sometimes the manager of the business does not have the capacity to operate it successfully. The owner simply makes bad decisions in critical situations. Given the competitive nature of some businesses and the unpredictability of profits, business results are quite sensitive to small errors.

What to do

Get the relevant training on your chosen business before you embark on it.Contact people that have been in the business and get insight from them. Learn the secret of their success. Learn how to manage crises, and how they sail through periods of hard times in their business life. If it will cost you to enrol for formal training, go ahead and do it. You can never learn too much.


2. Inexperience 

Entrepreneurs need to have experience in the field they want to enter. Too often some entrepreneurs launch their enterprise without having sufficient experience to succeed. Inexperience can be translated to mean lack of technical ability or management skills. Each of these shortcomings can lead to disaster. Ideally, a prospective business owner should have adequate technical skills i.e. a working knowledge of the physical operations of the business and sufficient conceptual skills.

What to do

Get the relevant technical details of your chosen field, as discussed above. There is no point venturing into a business to which you have little or no technical knowledge of.

3. Poor financial control

Every business venture requires proper financial control. This involves, among other things, having sufficient capital on hand at startup, and implementing proper cash management techniques. Going into business with insufficient start-up capital is a common mistake that most entrepreneurs make. They tend to be optimistic and as a result, often misjudge the financial requirements of going into business.


They start off with insufficient capital and can never seem to catch up financially as their ventures devour increasing amount of cash to fuel their growth.


Another aspect of poor financial control is improper cash management. This is usually evidenced by persistent cash - flow problems arising from credit screening, careless debt collection practices, and reckless spending habits.

What to do

Go into business with sufficient start-up capital. Get more training on financial management skills. At all cost avoid reckless spending.

4. Poor location

Just like the old saying goes about real estate -- what are the most important three things for success in real estate? The answer is location, location, location.  A business should be sited in a place where there are certain factors that will favour its establishment. Such factors as nearness to customers or target market are paramount to success in business.


This requires proper feasibility studies, investigation, and planning before a business location is selected. Too often, many upcoming entrepreneurs neglect this all-important aspect of business set up. Some just choose a particular location just because of its availability. The location question is much more critical to the success of a venture to leave to chance.

What to do

Carry out thorough feasibility studies and probably market survey before you choose a location for your business. Never leave the issue of location to chance.

5. Uncontrolled Expansion

Growth is a natural, healthy, and desirable part of any business venture, but it must be planned and controlled. Ideally, expansion should be financed by the profits a firm generate or by capital contributions from the owner. But most businesses end up borrowing at least a portion of the capital investment.


Sometimes owners encourage rapid expansion, only to have the business exceed their ability to manage it. As a business grows, problems increase in magnitude, and the owner must learn to deal with them.

What to do

Growth, of course, is a good thing, but it must be controlled.


6. Lack of planning

He who fails to plan is planning to fail. Research shows that less than half of small business owners had formal plans prior to going into business. Many engaged in formal planning soon after starting their businesses, but one - third could not recall ever having a formal plan (Holt, 1992).


Most small business owners usually disregard the process of strategic planning because they fell it is something that only benefits large-scale businesses. Plans are guidelines for action, and as businesses increase in size and complexity, they must be continuously upgraded to reflect changes in the business environment.


Generally, a business that fails to plan may also fail to survive. Without a properly articulated strategy, a business has no sustainable basis for creating and maintaining a competitive edge in the market.

What to do

Going into business without a proper plan is like walking at a brink with your eyes closed. You know what will happen to you. Have a proper plan before embarking on a business. You may hire the service of an expert to do that for you.


7. Improper attitudes

An unfortunate aspect of many business failures is that, too often, individual owners' attitudes get in the way of sound business practices. Some entrepreneurs blatantly disregard customers and some engage in unethical behaviours. They exploit customers to make a fast buck. Commitment to quality is replaced by a commitment to use sub-standard materials, to pass on marginally safe or defective products and to serve customers reluctantly.


These improper behaviours attract customers' reaction much quicker and the business owner will feel the brunt. If they feel cheated and dissatisfied, they will spend their money elsewhere.


What to do

Be committed to quality. Always place your customers' satisfaction as your utmost priority. Your business can go nowhere without your customers, so learn to treat them well.

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