Top Reasons for Small Business Failure

The Indian Economy is currently at its lowest it has been in a decade with falling industrial output and weak demand. Many large businesses are faltering and small businesses are shutting down owing to losses or lack of profits. With the economy becoming unforgiving, it is important for both startups and small businesses to cut costs and have a clear focus on the business. In this article, we look at the top reasons for small business failure - so the same can be avoided.

Lack of Funds

The number one reason business shutdown is the lack of funds. If an Entrepreneur is unable to properly plan finance and project future performance, the business could run out of cash - forcing a shutdown. Therefore, small businesses must always have an adequate cash reserve and plan for fundraising well ahead of time.

Lack of a Business Plan

Most small businesses and startups do not have a proper mission statement, goals or business plan. A lack of business plan shows that the Entrepreneur lacks planning or organization leading to many shortcomings in the decision-making process. Further, a lack of business plan also hinders raising of capital in the form of equity or debt, as investors or creditors need a proper business plan for investment or credit decision. Therefore, to better manage the business or easily raise capital, it is a must for every business to have a business plan. Lack of a business plan can lead to losses and business failure.

Lack of Internal Controls

Small business owners tend to often forget the importance of internal controls. Having strong internal controls include setting up a good accounting system, installing checks and balances and ensuring that any financial wrongdoing is quickly stopped. One survey reports that more than 70% of all small businesses have been subject to employee fraud due to a lack of internal controls. Therefore, the Entrepreneur must set up a regular system of audits, reviews and processes to avoid any fraud or leakage.

Lack of Expertise

No Entrepreneur, however capable, can have expertise in all areas. To be an effective businessman, an Entrepreneur must be capable of building a strong team with good expertise in key areas critical to business success. Key areas for a business could include marketing, sales, finance, purchase, production, human resources and staff management. Entrepreneurs must identify such critical areas for their business and appoint capable persons to manage those areas.

Wrong Choice of Location

Location of a business can mean success or failure in case of many businesses that rely on customer visibility, ease of access, parking facility, etc., In addition to the customer angle, a wrong location can also impact a business in other areas such as manpower availability, subsidies, taxation, cost of transportation, availability of electricity/water, etc., Hence, all Entrepreneurs must take care while choosing a location for their business.

Rapid Expansion

Rapid business expansion without proper funding, internal controls or plan could be a recipe for disaster for SMEs. The business expansion puts a huge amount of additional stress on a SMEs and proper planning, training program and hiring for manpower is essential to ensure the expansion is successful.

Lack of Professionalism

SMEs lose out to big businesses on a lot of opportunities mainly due to professionalism in terms of a well-designed website or brochure or marketing collateral. Website, business card, brochure and other marketing collateral play an important role in the customer acquisition process and it's important to display an air of professionalism. Therefore, all marketing collateral must be designed professionally and double-checked for typos, errors and user experience.