15 Practicable Ways For SMEs To Avoid Business Failure

Last updated on December 26th, 2022 at 02:42 pm

When a small business owner takes a bold step to set up a venture, definitely their plan is to expand, grow, and possibly go international.

Unfortunately, the rate of business failures across the world is disturbing and alarming in struggling economies. In the face of numerous challenges, how can small business owners avoid business failure?

While some of the problems are self-inflicting, the majority of businesses that close shops in their first year of operation do so because of unfavourable policies.

In Nigeria, for instance, data shows that 80% of Small and Medium Enterprises find it difficult to continue operations after five years of establishment.

The interesting thing about small business owners in Nigeria is that when they fail in one venture, they take another bold step, when they fail again, they take another try in another establishment on and on. They are resilient!

What is Business Failure?

How do we know if a business failed or when it is about to fail? I will use analysis to explain this: FYT Plc makes $10,000 as profit after tax every month, $10,100 goes into expenses monthly for maintenance, and staff salary. It means the owner incurs at least $100 loss every month.

The business continues to run a budget deficit every month, and by the end of the year, the business account has gone red with $1,200 loss.

No business survives by incurring a consistent deficit every year, and if it folds up, that’s a business failure.

Although FYT Plc makes a profit, meaning the business is profitable, because of poor financial management, he incurs debt.

So, business failure occurs when a venture ceased to operate because of its inability to make enough profit sufficient enough to cover its expenses. When there is no adequate inflow of revenue, a profitable venture may close shop.

A lot of young enterprises around the world experience the scenario above coupled with other challenges.

What is the Rate of Small Business Failure?

The rate of business failure varies from country to country. Let’s take a look at the possible rate of Small Business failures in 20 countries around the world, using 600,000 to gauge the percentage of business failure:

Nigeria:

80% of MSMEs fail in the first five years of establishment, according to a figure in 2020 by PricewaterhouseCoopers (PwC) Nigeria.

Interpretation: It means at least 480,000 businesses out of 600,000 are most likely to end operation within the time frame.

The UK:

20% of SMEs in the UK close shops in the first year of operation, according to a report by fundsquire.co.uk

What does this mean? If 600K of such small businesses were set up, it means at least 120,000 of such start-ups are most likely to fold up.

Ethiopia:

75% of start-ups are most likely to fold up in Ethiopia, according to The Better Africa report, meaning 450,000 may not survive to wave.

China:

Figure shows that in 2020 alone, close to 19% of China’s small businesses closed shops, according to a figure released by Tsinghua University, meaning 114,000 are most likely to end business if 600K businesses began operation the same year.

South Africa:

According to UWC statics, 50% of small businesses in S/A fail within a year of setup, meaning 300,000 are most likely to end operation.

Senegal:

Using 600K as a case study, 349,800 SMEs, representing 58.3% of SMEs are at risk of folding up if 600K ventures were set up.

Canada:

According to Key Small Business Statistics, 70 per cent of businesses in Canada survive only in the first three years, meaning 420,000 could exit the market using our figure.

Kenya:

58.7% of businesses in Kenya have slim chances of survival in the first five years. 352,200 are most likely to go bankrupt

Ghana:

In the first three years, about 75 per cent of businesses in Ghana close shops, meaning if 600K businesses were set up, at least 450K would exit the market.

Rwanda:

At least 75% of start-ups in Rwanda may find it difficult to continue operation in their first five years, meaning 450,000 of such SMEs out of 600,000 stop business

The US:

If you think that all small businesses in the United States have no issues, it means you’ve not seen the data from the country’s Bureau of Labor Statistics (BLS).

According to BLS, at least 20% of SMEs fold up in their first two years. It means 120K of 600, 000 are most likely to fail.

Australia:

Start-ups are not an exception in some of the challenges facing small businesses, as a figure from the Australian Bureau of Statistics reveals that 60 percent stop operation within the first three years of their of setup.

France:

The figure for SME failure in France is straightforward, more than 13,000 businesses fail per year

New Zealand:

Statistics New Zealand reveals that only 37 per cent of ‘micro-businesses, survive the challenges of SMEs in the first two years

Somalia:

60% fail in their first five years

Tanzania:

60.50% experience business failure in their first five years of establishment

Zimbabwe:

66.7% go out of business in first five years in Zimbabwe’s troubled economy

DRC:

66.7% of SMEs close shops within five years in the Democratic Republic of Congo

Ireland:

There are about 15,000 businesses that go out of operation every year in Ireland.

The Bahamas:

If you think it’s rosy in The Bahamas because of its tourism attraction, then you have to see the stats which reveal that more than 70 per cent of all small businesses in that small country end in total failure.

What Does This Mean?

You may be worried about what lies ahead as you set out to make a change in your entrepreneurial skill out there.

The table above isn’t meant to plant fear in you or the way you do business, but to open your eyes to many things you can do right.

Why do small businesses fail in less than 5 years?

Causes of business failure are numerous, ranging from social-cultural to policies among others, the major reasons why a startup may fold up include:

  • Poor siting of business
  • Poor marketing survey before setting out
  • No plan
  • Distraction
  • Poor customer service
  • Playing CEO role all time
  • Joining personal finances with business finance
  • Poor record-keeping
  • Cost of service charge of the business registration agent
  • Stocking low-patronage products
  • Working with negative people
  • Poor skills
  • Incompetent leadership
  • Totally depending on irresponsible government
  • Building fragile foundation

Strategic steps to take to avoid business failure

We’ve highlighted the causes, how can you prevent any of the above problems from pulling you down?

Location of Business

At the ideation stage of your business, you should ask yourself the most suitable place for your business.

If you’re a textile seller who operates in a location highly populated by senior citizens, you should know that most senior citizens are worried about what to eat to survive, and they have little interest in the latest wear and accessories.

To avoid failure in your business venture, take seriously where to site your business. If you sell wigs, bone straight (whatever they call it), your best location would be an environment populated by students of higher institutions, young ladies etc.

Research Before Establishment

The fact that your colleague is successful in selling of laptops isn’t an assurance that you’d succeed in the same business.

Before setting out to be CEO, conduct market research, and know more than you need about the business you want to venture into.

For instance, I have seen many laundry service providers who buy cars, and build houses, but in a real sense, there are several challenges that come with being a successful business owner.

If you think every clothes or textile can be loaded into the machine, you are most likely going to run into loss by the time you start paying more for damaging your clients’ clothing. Learn the skill involved.

Plan Before Setting Out

What’s your projection? If you have N500,000 to start a small business, it’s very important to include miscellaneous in your budget.

Investing entire money into a start-up without setting aside a running cost at the planning stage definitely means you’d have to keep your hands on the business finances when it has not made a sustainable profit.

This is where a business plan comes in. A business plan gives you a direction on where your business is headed.

Separate Personal Finances from Business Finance

The title of this guide says, ‘practicable’ ways, as such I’m going to paint another scenario: My business makes a daily profit of N2000 after all expenses.

Because of that, I budget N500 for a beer every day, that’s a minus to my daily income. But because I feel I’ve surpassed my projection, I feel I still have N1,500 left is a good reason for me to make daily taking a bottle of beer culture.

No business succeeds with this kind of practice. Taking your business to the next level means you have to make many sacrifices you wouldn’t ordinarily have made.

It’s important to separate your personal flexing lifestyle from your business finance. Regardless of how small the amount you take out of your business income, it’s going to have an effect, most especially for a start-up.

Business Finance Record

In one of our guides, we highlighted some of the benefits of keeping records for small business owners, you can find it at: https://infomediang.com/benefits-of-record-keeping-to-business-owners

To guard your business against collapsing, take stock of every expense, regardless of how small it is, it matters. Stop the syndrome of “it’s my business”

Leverage Comparative Advantage

So, you have kampala or adire, ankara, plain and pattern in stock. You bought the same quantity at the same time, but customers buy the adire more, in fact five times more than the other two textile materials combined.

That’s a clear signal that diverting a certain percentage of finance from others to purchasing more of adire wouldn’t be a bad idea.

Right Skills

If the success of your business relies on digital marketing, learn it instead of paying third parties every time to carry out the task for you.

If you have the budget for digital marketing, that’s fine. If you don’t, go on online, YouTube should be your resource centre to acquire this skill for free.

Work With Those Who Share Your Goal:

One of the ways to avoid business failure is to work with the right set of people, those who share your business goal, and workers who are enthusiastic about your business.

Most often, SMEs hire people whose objective is to earn a salary, from today, hire workers who are ready to work as partners not as workers.

Once you start working with negative people, you’re on the path of failure regardless of how you tried.

Poor Leadership

There is a popular saying, “once the head is spoilt, the rest of the body is in danger”. The same applies to business success.

A business founder who opens shops very late in the morning doesn’t send a positive message to his staff members or prospective customers who make purchases in the morning.

Fight Inadequate Funding With Your Skill

We know that in most developing countries, small business owners don’t have access to single-digit credit facilities.

But are you going to wait for a business loan from a government that is irresponsible and let it hold you from achieving your goal?

One of the ways to stop insufficient funding from preventing you from expanding your business is by selling your skills and supporting your business with the extra money you earn from it.

One of such is being a freelance writer, researching writing jobs, editing online jobs, and proofreading online jobs among others.

For instance, the government in Nigeria has been irresponsible since independence and those in positions of policy-making are not showing signs that things would change in 10 or 20 years from now.

Make Customer Services a Priority

To succeed as a startup, place a priority on customer satisfaction. Satisfying a customer could bring you tons of other clients.

Indirectly, a satisfied customer becomes your unofficial marketer whenever he sees anyone who needs your services.

If you don’t have a dedicated website for your business, you can go ahead to set up Google My Business page and encourage your customers to drop reviews and attend to their inquiries promptly.

Do It Yourself If You Can

We understand that division of labour can lead to more productivity, and contribute significantly to the success of your business.

But employing more staff than you can bear at the take-off stage means more expenses. It can affect your business finances in the long run.

One of the ways to avoid this failure is to carry out the tasks that would enable you to cut costs.

Over Excitement

Wondering what this is? Mr Tos is the founder of TOS Plc headquartered in Abuja, within a year of operation, his company turns in revenue that surpasses his projection. He moves ahead to open another branch office in Lagos and another branch in Kano followed.

He’s excited about his success, but has he taken time to build the foundation to the level of surmounting any financial challenges that might come in the next five years?

To avoid business failure, the first thing that should follow when you surpass your projection is to build a stronger foundation.

Don’t rush to expansion, it might spell doom for your business because you can’t be at the same location at the same time.

For instance, Arthur Guinness founded Guinness Brewery in 1759 in Dublin, Republic of Ireland.

The brewery’s success incredibly surpassed the projection of the founder, but the company took its time to expand to other countries around the world.

It took several years before expanding to other regions and countries around the world. For instance, it began operation in Nigeria in 1962, that’s close to 200 years after its establishment.

Don’t get me wrong, there is nothing wrong about business expansion, but ensure that you’ve built a stronger foundation that can surmount unforeseen challenges when they come.

Register Your Business Yourself

To have access to some of the rare government and banking SME loans in Nigeria, your business must be registered.

Thankfully, the Corporate Affairs Commission (CAC) has gone digital, meaning company and business registrations are now done online.

If you master the process and do the needful, you can get your business certificate within seven days.

Doing it yourself means, you’d be able to cut cost of using the services CAC agent. The exception to this is when you know you can’t handle the registration, the services of an agent suffice.

Consistency

You sell clothes today, next month, you sell electronics, the following year, you want to sell organic products, while you still have in your lineup to supply medical equipment.

Business success takes time and consistency, and don’t expect that everything would be rosy, but your consistency and ability to manage challenges will give your business over your competitors.

Bonus:

Choosing the Right Business Domain Name

Choosing relevant and easy-to-remember domains is one of the first steps any new business owner must take.

Like your physical shop which people around your location can always come to, you must ensure that your business has an online presence.

And not just having an online presence, you must carefully choose a business domain name that resonates with what your business does and represent.

References:

  1. mondaq.com/southafrica/corporate-governance/869762/why-do-small-businesses-fail
  2. nzbusiness.co.nz/article/fail-exposé
  3. wsj.com/articles/for-chinas-small-businesses-life-is-still-far-from-normal-11619953204
  4. eulerhermes.com/en_global/news-insights/news/press-release-insolvencies-euler-hermes-business-failures-in-fra.html