IFE ADEDAPO identifies causes of business failure and how to avoid them
While many young people are being encouraged to pursue entrepreneurship, it has been discovered that most of such businesses end in failure after the first two years.
Statistics from the Small Business Administration state that nearly 66 per cent of small businesses will survive their first two years, meaning that only about one-third of total businesses will actually fail in these first two crucial years.
In addition, a research by Basil shows that most SMEs, particularly in Nigeria, die within their first five years of existence, another smaller percentage goes into extinction between the sixth and 10th year, while only about five to 10 per cent of young companies survive, thrive and grow to maturity.
These statistics are confirmed by the rate at which small businesses struggle to survive and how small business owners enter the labour market after two to three years of unsuccessful entrepreneurship in Nigeria.
Entrepreneurs often complain about difficulties in raising capital as the major challenge they encounter, but experts posit that there are more fundamental reasons why small to medium scale businesses gasp for breath in Nigeria.
Poor economic conditions
Business confidence in the economy by investors continues to drop as recently demonstrated by the exit of JP Morgan from the Nigerian Stock Exchange and how many corporate organizations have been declaring huge losses.
In the same vein, SMEs that are seen as a major driver of the Nigerian economy are at the receiving end of the poor economic conditions caused by the policy directions that are not in their favour.
Some start-ups that got capital through loans are finding it difficult to repay due to the high operational cost caused by government regulations.
As observed by experts, multiple taxes, high electricity tariff, high cost of rent among others are making it difficult for new business entrants to recoup their investment.
While some of these economic factors are beyond the reach of most entrepreneurs, experts suggest that small business managers can do well by addressing the factors within their reach.
A business consultant, Mr. Deji Onasanya, says SMEs can reduce their overhead cost by employing few people to support in the management of the business and handling the marketing and sales aspects of their business themselves.
Diversion of funds
Experts say taking business risks has its own reward because it may cause business owners to become more creative and expose them to other opportunities and new challenges, but the outcome is not guaranteed.
The quest to make quick money, according to the Faculty Director, Soar & Heritage, Mr. Sola Adeyiga, has been the major undoing of many business owners, who venture into other business opportunities they don’t even know anything about.
Although business owners are expected to be risk takers, he says it does not mean they should jeopardise the destinies of their company and the other stakeholders by diverting funds meant for the business into a completely different business opportunity or any other non-operating project without sound and objective scenario planning.
Diversification into other ventures, according to Adeyiga, must be taken after careful analysis of the opportunities and how such investment will affect the well- being of the existing business line(s).
Poor knowledge of financial management
Business consultants say entering into a business should not only be about gut feeling that it will work out or about excellent technical skills, but proper managerial skills will determine its staying power and success.
Out of the three core aspects of a business which are: operations, marketing and finance, Adeyiga says most business owners only have passions and skills which may only be sufficient to succeed in operations and marketing functions. An average business owner uses the rule of thumb to manage the company’s finances.
Adeyiga says, “You often hear pieces of advice such as – you are a good cook; you should do well in a restaurant business. This suggests that doing business requires only passions and skills. But the question is why businesses run by people who are passionate and technically sound, still fail?”
He says while structured organisations have the capacity to employ competent people to perform these critical functions, small businesses often rely on the business leader to champion them.
Adeyiga explains that a fair understanding of accounting, bookkeeping and finance can change the fortune of any business.
Lack of legal framework
Professionals say a business can be formed as a sole proprietorship, a partnership or a limited liability company. While the sole proprietor and the partners are not usually separated from their businesses, the owners of a limited liability company are different from their company.
Basically, a company is a legal entity separate from the shareholders or managers. Its affairs must be separate from the owners’ affairs, according to Adeyiga, and this includes the bank accounts and other assets and liabilities of the company.
He says, “Unfortunately in Nigeria, most small business owners don’t treat their companies separate from themselves. They are the Chairmen or chief executive officers and thus, have the right to take cash from the company’s accounts for personal use without refund.”
According to him, a business owner, who also works as an employee of his company, must pay himself a salary.
He says, “While such a salary must be good enough, it must also be affordable by the company. Aside from the salary, a business owner working as an employee of the company can be entitled to bonuses and profit sharing just like the other employees. He is however entitled to dividend as a shareholder of the company.”
He emphasises that profit sharing and dividends should be paid from net profits. Small businesses should stop the habit of unbridled withdrawal of funds from their bank accounts for personal use, which has no potential for growing the business.
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