Significant contribution of small business everywhere in the world compels us to understand the causes of its failure. Recent studies have endorsed the fact that there is increased interest in the output of the small firms. After knowing the affairs of the small business firms, policy makers would be able to make their policies to rescue them out of failures and help them begin a journey of stability and durability. It has also been suggested that research on specialized small business failures will be more helpful in revamping the important sector of the economy. Small businesses shave higher probability of failures than experienced by large businesses.
Studies in all industrialized economies accept that small business is the most important engine of employment. Failure of business creates a chain of negative effects resulting from unpaid creditors, bad debts and other multiplier effects. When a business fails to take off, the prospective benefits, which would have been realized in otherwise scenarios, are also defeated. It is also the considered opinion of many exports that small businesses are more innovative than the large ones. Small business contributes to the stable macroeconomic situation of the given country, which is highly impaired in the absence of the success of the former.
There are many reasons why small businesses fail. In the literature which traces reasons behind such happenings, a clear distinction has been made between the internal and external factors which lead to the failure of small firms. The internal factors are those which are distinct and particularly associated with firms and the external factors are associated with the trading context in which firm has to find a place for itself.
The external factors entail price contexts, inflation, interest rates, wage expenditures, downfall in the markets, tax levying, chronic debts and market rivalries. Internally, the causes of small business failures have been connected with management problems. Avery defining characteristic of the small business is the problem of expecting too much from a single person who may not be equipped with skill to run the business and thus cutting sorry figure in the end. In all types of businesses, the managerial functions pertain to marketing, sales, economic management, buying, strategizing, supervision, sales and several others.
Failure can be the outcome of mismanagement in one domain or combination of many of these factors. Often the stated failure of the small business or even the big companies is related to the weaknesses in the management.
Research has concluded that internal factors contribute more to the decline of the business than those of the external factors. “Study results also aid in the identification of problematic areas for business owners which should prove useful to small business support agencies, counselors, and consultants. Assistance needs are warranted in financial management, competition and growth strategies, but perhaps, most importantly, in managerial planning areas.
Training programs and small business support endeavors need to focus on equipping small business practitioners with the managerial skills necessary for effective small business operation as well as a conceptual and cognitive understanding of how these functions affect business performance” (Robinson, R.B., and J.A. Pearce, “Research Thrusts in Small Firm Strategic Planning”).
Flawed planning, weak marketing, inefficient control and lack of cash are the most important reasons marked for the failure of the business. Additionally, these can be linked with the personal attributes of the one-person- managers and their disposition to the risk and control, faulty decision making and blurred vision. Lack of broad focus also significantly contributes to the given situation. Various studies have concluded that never a business has failed for sole reason but external and internal factors combine to shut the business by brining it down to the knees. These factors persist for a considerable period of time too.
There is also one other attribute which is relevant more with symptoms rather than reasons is the collapse arising out of the over trading. The small business often run into problems when they borrow more than their capacity to repay and stretch themselves in an effort to pump confidence in the partners. Over trading is quite different from under trading which is the simple condition of lack of sales and consequently less dangerous to cause eventual failure. “Working capital management is related to the day-to-day operations of the firm.
Many activities of the firm are related to working capital management including poor vendor relations (part of working capital management) which has a direct impact on the viability of the firm. If the firm is unable to obtain merchandise due to poor vendor relationships then customers may patronize competitors. Poor record keeping can also lead to strained relationships with vendors which may result in difficulty in obtaining and receiving merchandise” (Larson, C.M., and R.C. Clute, “The Failure Syndrome”).
New business owners are wanting in the relevant business and management techniques essential for successful running of business. Purchasing, selling, employing, manufacturing all demand utmost aptitude on behalf of those who are at the helm of affairs and should do their level best to develop an attitude, which is also quite helpful in the management process. They must be well equipped with the management knowledge and should not be prone to frauds and cheating.
Neglection of business may bring about its downfall. Active participation and appropriate attention in the affair of business is a sure way to avoid backlog and consequent failures. Caution must be exercised to plan and study research data about the basic facts and figures for the running of the business along the most up-to-date lines.
The knowledge about customers is very important to imbibe and managers must remain well versed in this domain. “Customers can’t walk through your front door if they don’t know you’re there. Learn how to cost-effectively advertise and promote your business through such tried-and-true methods as direct mail, ads in local newspapers, Web sites, blogs, even by sponsoring a local little league team. The number of advertising and promotional ideas that exist is only limited by your own creativity” (Peterson, R.A., G. Kozmetsky, and N.M. Ridgway, Perceived Causes of Small Business Failures: A Research Note).
Useful managers are characterized by creating an environment which leads to increased productivity as a result of active participation on behalf of employees. This quality in employees is produced by the managers exploiting their best motivational skills. The hiring of competent persons is also a management skill in the absence of which no business can be managed well. Firms always rely on alternative systems of awards and punishments for the employees to engage them in the work. Managers infuse the idea in the hearts and minds of the employees that their interests and that of the firm are similar and we must also strive for a common goal.
Strategic thinking is the area where manager must be adept in. A manager must be able to turn his or her vision into reality otherwise the failure will loom large on the horizon of business. Alterations and modifications are essential in the business as the conditions keep changing. “The only constant in business is change. Once mighty behemoths fall to earth when unknown upstarts rise to prominence.
The ability to recognize opportunities and be flexible enough to adapt to changing times is a key ingredient to surviving and even prospering in the toughest business climate. Therefore, learn how to wear multiple hats and to generate new interests and areas of expertise”. (Star, A.D., and M.Z. Massel, Survival Rates for Retailers). If the management fails to change the business with the changing times, then it must result in total collapse. Keeping business in line with the changing trends is the requirement for the success of business. Lack of operating funds is big problem for the small business.
Business owners often fail to truly assess the amount of capital needed to run a business and fall short of it after launching it, when the intimate needs arise. Their expectations of incoming revenues may also be false. The expenditures of starting business must be truly calculated. Not only this is essential but also the expediters of maintenances and in other words staying in the business must also be realistically calculated to offset any future risks. It is significant to observe that several business take time that is up to two years to be productive. This much time is very critical for inflow of cash for the survival of the business. The straightforward case is that owners must have sufficient capital to spend until the sales start to cover those expenditures.
Location where business is being installed is of prime importance. While a good location may be instrumental in the survival of business, a bad location has the potential to undo all the future success of the business and thus causing it considerable harm in the long run. It may engender the owner to wind up his bag and baggage and thus knocking him out of the competition. Parking facilities, congestion, accessibility, and security of building, local attractions and the aptitudes of the community are some of the factors which must be taken into account while deciding the location of the small firms.
Business plan is inherently associated with the unbeaten small firm. Many such businesses fail to rise above the ground because there are certain flaws in the business plan. It must be thought as well. Educated projections are must in this context and failure to appreciate the things in the light of facts is recipe for disaster. Examination of the business, ends, roadmap for success and workforce needed are all included in the business plan.
Furthermore it also takes care of the budgeting, cash flow pros and cons, management of growth of company. Bankers are also in need of the business plan if management wants to get capital. “Yes, you must have a business plan. It can be a simple three-page plan or a huge 40-page plan. The point is that you’ve looked at all the aspects of your business and are prepared to handle problems when they arise. Your business plan helps you to focus on your goals and your vision, as well as setting out plans to accomplishing them. And don’t get mellow – revisit and revise your business plan annually” (Susbauer, J.C., and R.J. Baker, “Strategies for Successful Entrepreneurial Ventures”).
A leading reason of the failure of the small firms relates to overexpansion. It occurs when business owners mistakenly take expansion rate as substitute for success. A concentration on slow but continued growth should be prime goal of business rather than any day dreaming. It is well known fact that bankruptcy is often the result of fast growing companies. However, growth rate should not be repressed at the same time because of being over cautious. Once the business starts expanding after going through the natural phases of evolution, its direction is settled after such an eventuality.
Undercapitalization is inheritably associated with small firms. It is because of their smallness that the business failures happen. Smallness in this context is taken synonymous with insufficient resources to pursue business and take it to the advanced stages. Business that begin with adequate resources are less likely to collapse and go bankrupt that those who otherwise have lesser resources and thus failing to anticipate all possible scenarios sufficiently.
Financial controls are essential for business to move in the right direction and avoid any form of hazard to happen in future. In case of large business, long term spiral takes place before it begins its journey of downfall. However, in case of small firm it may happen in a jerk given the volume of the business.
Lack of experience of owners and managers is also of the foremost reason of the small business failures. Owners may load themselves with the responsibility of pursuing the goals which they have never previously pursued. Their insight is highly loose and their plans ineffective to take care of the emerging complexities. Business managers and owners must strive their best to know that the responsibility with which they are going to be charged is easy to lift and bear with. They must be doing justice to themselves and the employees around them rather than venturing into unknown areas and ensuring the failures of the business.
There are two basic traits of the small business which distinguish them from the large companies. One is their being too small and other is their pace of failure. High incidence of failure is a sure sign for the weakening of economy and large numbers of employees are deprived of their means of subsistence. It is really unfortunate for number of people whose economic conditions are connected with the success of the small firms in which they work. Overall productivity of the economy is the function of flourishing rate of small business. These businesses should be well managed both internally and externally.
Almost half of the small business fails to survive after two years of their launching. Lack of planning and under-spending are the most compelling factors for such an eventuality. “More often than not, the one thing that separates small business successes from small business failures is planning. With all of the resources available to small businesses these days, there is no excuse for not taking the time to create an executable business plan for your company.
A good business plan is a roadmap that highlights the best routes to profitability and warns you of potential hazards along the way. If you don’t have one, it’s highly likely that you’ll be lost – and out of business – in no time at all”. (Wichmann, Accounting and Marketing–Key Small Business Problems).
A successful business always begins with an idea and follows the planned course, rather than taking different directions and wavering in the end. The new business must target a market and intend to fulfill the marketing needs. Most of the business either endeavor to successfully resolve the problems of the customers or add to their benefits. If already a market of the product and services exist in which the new small firm is going to deal with, then improved quality or something distinct must be offered to get established.
It is well researched fact that small business fail because both internal and external factors block their way of progress. While the internal factors fall within the range of the management, the external factors must be engineered by the government and the business bodies to make them ideal for the collective benefits of society. Governments can have a two point strategy to cut the number of small business failures. They facilitate the generous support to a fixed number of such companies which is also called picking winners policy. The second one relates to the creation of such an ambiance where small business will be definitely flourishing without any risks.
This may also be called a general support intended for all firms in the given environment. The prime policy which any government can undertake to avoid unpleasant situations for the small businesses is to sustain the non inflationary rise in the macro economy. By executing such measures, the government is going to ensure the removal of the susceptibility of the small businesses and their capacity to do away with the external shocks.
Small businesses fail because of variety of factors. The high ups of the business must take all possible measures which are quite essential for businesses to begin. They should gather all resources for staring a business and then the cost of staying in the business must be in their hands so that it can be used when necessary. Small business failures are great loss to the economy as large numbers of employees suffer and their overall effect on the economy of the country is extremely disturbing.
There is need of more research to conclude the reasons of the failures, though large work does exist on it but with contradictory findings. After having consensus on this important issue of failure of small firm, we will be better able to deal with such eventualities.
Blue, T., C. Cheatham, and B. Rushing, “Decision Thresholds and the Developmental Stages in the Expanding Business,” Journal of Business and Entrepreneurship 1, 20-28. 2001.
Peterson, R.A., G. Kozmetsky, and N.M. Ridgway, “Perceived Causes of Small Business Failures: A Research Note,” American Journal of Small Business 8, 15-19.1998.
Larson, C.M., and R.C. Clute, “The Failure Syndrome,” Journal of Small Business Management, 35-43.2005.
Robinson, R.B., and J.A. Pearce, “Research Thrusts in Small Firm Strategic Planning,” The Journal of Business Venturing,. 2003 .128-137.
Star, A.D., and M.Z. Massel, “Survival Rates for Retailers,” Journal of Retailing 57, 87-99. 1999.
Susbauer, J.C., and R.J. Baker, “Strategies for Successful Entrepreneurial Ventures,” Journal of Business and Entrepreneurship 1, 56-66. 1999.
Wichmann, “Accounting and Marketing–Key Small Business Problems”, American Journal of Small Business 7, 19-26. 2002.