It is often accepted in business scenario that between 65 and 75% of all new small businesses will fail. Most of these failures occur within the first three years of starting up, referred to as “initial danger period” and sometimes continue until the next two years, unless a serious business facelift is done, or the small business closes altogether.
Financial services and bank lenders recognized the high incidence of these failures in the early period of small business operation. It then becomes difficult to obtain business finance for a new business without adequate security and demonstrated management ability.
Reasons for Failure of Small Business
- Incompetence of management or leaders
- Cash problems and financial mismanagement
- Poor marketing and inadequate sales
- Staffing problems
- Poor record keeping
- General economic conditions
- Poor business planning
Most of these failures are caused by internal factors. Internal mismanagement causes the majority of small business failures.
Significantly, financial mismanagement, mainly failing to manage cash flows so that there is sufficient cash in the business to pay debt, is a major problem. Some of these financial problems that relate to cash problems include:
- Excessive drawings from small business owners
- Excessive borrowing
- Excessive cut of prices
- Lack of cash flow planning
- Lack of appropriate business insurance
- Overuse of credit
- Over-investing in assets including stock
- Under-capitalization from business start up
Significant Trends in Small Business
In recent past years, several trends and developments worth noting have occurred in small business practices:
Increase in Home-Based Businesses. The development of better and more affordable office technology has made home-based businesses proliferate. Work from home can be operated on a part-time or full-time basis. Home-based businesses save on business costs such as rent, electricity and telephones. Many home-based businesses are consultancies, publishing or other services.
Growth in Business Franchising. In recent years, there have been more opportunities for people to buy franchise outlets from well-known businesses. The number of franchise outlets has grown significantly each year.
Advent of the Small Biz “One-Stop Shop”. Especially in the retail industry, small businesses are now offering a wider range of products and services within one location for the convenience of customers. These are known as “one-stop shops.” The best example of this trend is the handy 24-hour self-service petrol stations complete with mini-supermarkets. Many local corner shops experienced decline from the emergence of these one-stop shop operations.
Advances in Small Business Office Technology. Technology fast advances have affected many aspects of small business activity, particularly in communications and information processing technology. The effect of new office technology has been seen to reduce the time in performing business tasks and therefore an improvement in office efficiency.
More Women Joining Small Business Force. As more and more women have entered the small business scenes as owner-operators and consultants, a change in social attitudes has been greatly reflected. Many women prefer to go into small business as it offers them more independence and control to pursue a career of their choice, and also become a work-at-home mom.
Increased Flexible Business Hours. Many businesses, small businesses included, have become more flexible in their opening times to cater for the convenience of their customers. Also, businesses are opening longer hours, weekdays and weekends.
More Small Business Skills Training Opportunities. A significant growth in the number of training courses have become available that teach skills relevant to small businesses. Aware of an increasing complexity of business the environment especially with the advent of the Internet, more people have taken advantage of training and small business courses online or classroom studies. Also, more small business and home-based business people have realized that skills training in business is essential for a successful business.
All of these changes indicate that small businesses have to operate in many of these difference occurring trends. However, while some trends and developments can cost money and time and others can improve the business, small business failures caused by internal factors can be avoided if sound management techniques and strategies can be applied, for example, learning the business prior start-up, the practice of time planning, how to manage time and set priorities.
If necessary, a good advice is to hire the services of business consultants who can polish a business to a level of perfection.
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