Why do so many small businesses fail in their first year?

Dave JoneseLearning, Finance for Non-Financial Managers0 Comments

There is no doubt that the environment for business is tough, with 50% of small business expected to fail within 5 years. Many of the adverse factors affecting business, such as tax and bank lending are out of the operational control of business owners and managers.  So in order to survive, small business needs to make the most of their resources and ensure that they have the knowledge and skills to survive.

Also listed among the common reasons for the failure of small business are:

  • A lack of business acumen,
  • Poor financial planning,
  • Bad cash flow management.

To survive, business owners and managers of small enterprises must be able to rise above the minutia of day-today business decisions and see the bigger picture.

They must understand how the cogs of business fit together to impact profitability and cash flow, and they must be able to assess the impact of their potential decisions on the success of the business.

To truly understand the business, owners and managers have to understand how their business makes money – in other words, how it generates sales, maximises profit and manages cash. They need to understand that every action taken and every decision in each area of their business will impact these ultimate measures of business success.

Business owners and managers of small enterprises are typically forced to develop this business acumen on their own. They are hands-on with their businesses, having to make all the decisions as they go along, whether good or bad. As the statistics show, they either learn from their mistakes or fail.

Common problems for SMEs

Small and Medium Enterprises (SMEs) are often confronted with problems that are uncommon to the larger companies and multi-national corporations.  These problems include the following:

  • Lack of Credit: SMEs frequently have difficulties in obtaining capital or credit, particularly in the early start-up phase.
  • Profit vs Cash: Understanding the difference between profit and cash.
  • Cash Flow Management: Protecting and enhancing their cash flow position.
  • Financial Statements: Understanding financial statements and their use in making better business decisions.
  • Survival, stabilisation and planning for the future.
  • Working capital, investments, financing business assets or assistance with international trade.
  • Restricted Resources:Their restricted resources may also reduce access to new technologies or innovation.
  • Resistance to Change: Many of the employees in SMEs started from the ground up after working with the company for many years.  Some of them are often holding supervisory and managerial positions. These employees may not be IT literate and often have high resistance to the changes in the working process that they are comfortable with after many years.
  • Lack of Procedure: Most SMEs do not have formal procedure or often these are not documented.  Furthermore, there is tendency for these procedures to change frequently.  This makes it difficult for third parties and newcomers to understand the existing business practices.
  • Lack of Managerial Training and Experience: Managers who are promoted from the rank and file may not have had the exposure or training needed to perform as leaders and managers of people.
  • Manpower: SMEs are frequently fire fighting and suffer from shortage of manpower.

Brightbolts supports business by raising the financial literacy and business acumen of managers.

Brightbolts are specialists in helping managers and organisations raise their levels of financial literacy and commercial awareness. Our suite of customisable Finance for Non-Financial Managers eLearning courses are used by leading global organisations to equip their managers with the skills, understanding and acumen needed to be financially fit and ready for the challenges of running successful businesses.

Or contact us, to see how we can help you and your organisation…

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