Statistics reveal that 50% of small businesses fail within two years of inception. One research conducted by the UWC indicates that between 70% and 80% of small businesses fail within five years. The impact of these failures on the economy and unemployment is substantial. But what factors contribute to the collapse of small businesses?

Unsuitable product offering:

A product or service that fails to meet the needs of the target market can doom a business. It’s essential that small businesses conduct thorough market research to understand customer needs and preferences. The business should develop a unique value proposition that differentiates it from competitors. A failure to continuously innovate and adapt the product offering to market changes can lead to a decline in sales and, ultimately, business failure.

Inadequate customer understanding and engagement:

Understanding your customers is crucial to the success of any business. Without a deep understanding of customer needs, wants, and behaviours, a company may struggle to attract and retain customers. This can be especially problematic for small businesses that rely heavily on a loyal customer base. Effective customer engagement strategies, including personalized service and regular communication, can foster stronger customer relationships. A failure to engage with customers and respond to their feedback can lead to customer dissatisfaction and, eventually, a loss of business.

Inadequate planning:

Many businesses are established as a means of survival. Business owners often register a company without a detailed plan regarding its operation. There are no clearly defined short-term or long-term goals, leading to a lack of understanding of costs, responsibilities, markets, funding needs, and other business requirements. As a result, business owners eventually run out of steam and must return to the drawing board. It is crucial for business owners to create a well-defined plan and maintain a business data room with critical information to aid in discussions with investors or when seeking funding.

Overreliance on a single individual:

In many small businesses, the owner is the primary point of contact for all matters. They handle customers, suppliers, employees, production, administration, shareholder relations, and general problem-solving. This leaves them with insufficient time to focus on essential business aspects, such as growth and strategy. Business owners should identify areas of their business that can be delegated to assistants or other employees to free up time for more important tasks.

The UWC report shows that personal initiative and goal setting are consistently related to business success. A proactive approach to dealing with issues is more likely to succeed than a reactive one.

Failure to differentiate personal and business accounts:

Mixing personal and business finances can lead to confusion and difficulty in tracking expenses and measuring profitability. Business owners should decide on a monthly salary based on their living expenses and the company’s cash flow and tax implications. They should avoid owing the business unless they have a solid repayment plan in place.

Insufficient record-keeping and financial systems:

Many small businesses lack proper financial records, systems, and technology due to cost concerns or fear of the unknown. However, businesses that adopt cloud accounting and other technologies can achieve efficiencies in various areas. Real-time data access can also enhance decision-making quality. Small businesses should embrace technology as an ally, proactively seeking solutions before the lack of it forces them out of business.

Delayed payments by larger businesses:

In countries like Kenya, late payments to suppliers are being considered for criminalization, highlighting the severity of the issue. Cash flow is vital for all businesses, and small businesses must pay their suppliers, who may also be small businesses. Large companies and government departments should process supplier payments more quickly and address officials demanding kickbacks from small businesses.

Passion does not equal expertise:

Passion cannot replace experience. Small business owners should stay ahead by attending managerial, business management, finance, and tax training programs. They should maintain a keen interest in their financials as well as their bank balance.

Ineffective management:

The saying, “People don’t leave jobs, they leave managers,” rings true. When hiring managers, it is essential to find individuals passionate about developing and listening to others. Otherwise, high staff turnover and the associated costs of hiring and training.