Five Reasons Why Small Businesses Fail

If you cast your mind back to your interaction with most entrepreneurs (and if you are an entrepreneur yourself), there is a high probability that you will find a common denominator amongst all the entrepreneurs you meet. There is an unbelievable dosage of passion and energy that is always evident when an entrepreneur is describing the inspiration behind his or her business model and why the model was on the verge of heralding “the next big thing”. Sadly, passion and ”big talk” are not often enough to help small businesses survive the first twelve (12) to twenty four (24) months of their business life. 

So why do small businesses fail? 

1. The quality of the business idea: The primary aim of a business is profitability and the seed that births profitability is the idea that is translated into a business model. Most often than not, entrepreneurs do not subject the quality of their ideas through the required rigor and stress testing before taking it to market. This is one main reason why small businesses in Nigeria fail. No matter how exciting and innovative an idea might sound, it is pointless taking it to market if its profitability and sustainability have not been tested. 

2. Motivation and Passion is not always enough: In today’s Nigeria, motivational speaking and inspirational talk appear to be the new “cool” and as such many entrepreneurs find themselves listening to a lot of these speakers, as they attempt to start or reposition their businesses. While there is nothing wrong with the activities of motivational speaking and coaching, the reality of starting a business goes beyond the excitement that comes after being exposed to a “think big, dream large” session or a “don’t walk on the earth, start from the sky” message. There are many other things that must support one’s passion or excitement – such as technical competence/skills, structured execution of strategy, effective cash-flow management, hiring the right people for the right roles at the right time to mention a few. These elements when mixed with passion, energy and excellence in the right business environment will help a great deal in achieving success. 

3. Taking giant strides instead of baby steps/Poor planning: “The journey of a thousand miles, starts with a step”. This is a simple but difficult reality to implement for most small businesses in Nigeria. The going-concern status of every business should be considered 

a marathon and not a sprint. Unfortunately, most start-ups today have elected to take giant strides at the commencement of their business operations instead of the required baby steps. In Nigeria, societal pressure sometimes pushes a lot of entrepreneurs to do things in the early days of their business. This ends up being detrimental to the medium or long term survival of such a business. They sometimes begin with incurring expenses that at best can be described as wasteful. For example, setting up fancy offices, aggressive above-the-line marketing, acquisition of operational vehicles, a full complement of staff etc. While there is nothing wrong in doing these things, the reality is, most small business owners commit funds that should be used for the core of the business on non-essentials – which at best satisfy their egos and give them a false sense of societal acceptance. In no time, they have used up funds that should be used for the core of the business on non-core business activities. 

4. No Staying Power: Most entrepreneurs, today, lack what may be termed as “staying power” as they give up their ideas once they hit any brick wall on their journey. Entrepreneurs are expected to brace up for turbulent times especially at the beginning when it appears that all that was thought through may have been wrong. The right mental attitude, coupled with a clear plan, proper structures and effective cash flow management will be required as you ride the waves. A dogged and resilient attitude in the face of serious opposition to the set objectives is most often missing in most entrepreneurs especially within the younger generation. The saying that life is not a bed of roses is applicable to businesses too. It may not always be smooth but entrepreneurs with staying power ride the waves and always come out stronger and more profitable. 

5. Poor Records Keeping: Most entrepreneurs are guilty of not keeping proper records of activities concerning their businesses. Truth is, most entrepreneurs don’t set out with the mind-set of not keeping proper records; yet a large number fail to keep track of business activities or transactions. 

Many small business entrepreneurs fund their activities from savings, friendly loans or even gifting’s from family members. These funds, which may come in form of cash in hand, are easily expended without keeping track of such outflows. Sometimes, assets may be purchased, transferred or even given out but most entrepreneurs fail to recognise and record these activities as they occur. At every stage of a business, from ideation right through to actual incorporation and commencement of the business, resources are deployed and put to use. Sometimes these resources are deployed so quickly that capturing them at a later date may either be impossible or done without the required 

accuracy. Absence of accurate records often leads to poor decision-making, and poor decision-making is normally the foundation for failure. 

The above five reasons are non-exhaustive and the jury is still out as to what percentage of start-ups or small businesses fail within the first two years of commencement of business operations. While some researchers have put it between 80% and 90% failure rate, some others have estimated it to be around 50%.

Chukwuma Nwanze- Executive Director

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