Not witchcraft: 5 reasons small businesses fail

Only a third of new businesses survive beyond second anniversary

In Summary

• It is essential to develop a strong management team or seek out the help of outside consultants or advisers

Good plans gone bad
Good plans gone bad

Despite the increasing number of job seekers chasing too few jobs, there’s still a marked reluctance by many to start businesses. The most often cited reason is the lack of capital but there’s more to it than that.

Indeed many businesses have succeeded despite starting with almost no money. Lots of people say they have neither the aptitude nor the skill for entrepreneurship thus excusing themselves from starting a business. While aptitude and experience are necessary for success, these can be learnt. The only way to get experience at something is by doing it, isn't it?

Perhaps the main cause of reluctance is the fear of failure. Starting and running a business carries with it a risk of failure. Everyone knows somebody who failed spectacularly at business. The statistics are not encouraging either. Generally, only one-third of new businesses will survive beyond their second anniversary. The reasons vary across but several common strands can be seen.

1. LACK OF EXPERIENCE: Dr GSK Velu, a serial entrepreneur in India, says many new entrants in business lack the necessary skills to effectively manage all aspects of their business, from finance and operations to human resources and customer service. “It is essential to develop a strong management team or seek out the help of outside consultants or advisers,” Velu cautions. You should also invest in ongoing training to stay up-to-date on the latest business trends and best practices.

2. LACK OF CUSTOMER VALUE: Entrepreneurs get so busy running their businesses they forget their customers' needs. Furthermore, customer needs are constantly changing. Competitors are coming up with new ways to attract clients. An initial bout of success can lead to complacency. To stay on top of the game, keep adapting to meet the needs of your customers, while keeping an eye on the competition. A good example is the manner in which manufacturers have adapted to inflation with lower-priced versions of their main products.

3. DISHONEST EMPLOYEES: You might have a great business attracting customers, but theft by employees could wreck it. As we have seen in Kenya, even big companies can collapse due to employee fraud. Ensure you employ the right calibre of people by thoroughly vetting them through background checks. Use technology to monitor the items in stock, sales and cash flow to detect malpractices before they go too far.

4. DISASTER: Priscilla Akinyi ran a thriving stationery shop in Nairobi’s CBD close to the University of Nairobi. One day, rioting students raided the street where she was located. Akinyi’s business was among those looted. “They took everything. The damage was so much that I could not continue doing business,” Akinyi recalls. With no further capital to rebuild, she had to look for employment. Unrest, crime, natural disaster or an accident can devastate even the best-managed business. Insure your property to better survive the shocks when they come.

5. BAD LOCATION: Sometimes, a small business may fail simply because it is located in the wrong place. Due to the cost of rent along busy roads, new entrants into business often get tempted to take cheaper premises. The problem with cheaper commercial premises is that there may not be many customers around them. It is better to locate your business where others are doing similar things. A place with 10 boutiques selling a variety of clothing is likely to attract more customers compared to a single, isolated boutique.

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