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Where it goes wrong
Small business owners are usually specialists in the product
or service their enterprise offers, or are very good at selling
their product or service. However, management skills are often
a problem, with many small business owners lacking the ability
required to develop a strategy, make detailed plans and manage
people. Because of this, small businesses are often managed
on a day-to-day basis and long-term planning is neglected.
In many cases, the business owner does not intend the venture
to grow, but simply to keep going. This can lead to business
instability and employee insecurity. Small business owners
are very independent and this makes them less inclined to look
for or accept advice from outsiders.
Financial difficulties are another major factor in business
failure. The owners may have invested a lot of money in their
business. This may include life savings, their home and other
major personal assets, so careful financial management of the
business is crucial. The main financial areas causing problems
for small firms include:
- Poor accounting and financial management. Finances
are often managed badly because of a lack of skills in this
area. As with other management skills, small business owners
are often inexperienced in financial organisation.
- Cash flow and late payment problems. If money flows into
a business slower than it is paid out, the business has to
rely heavily on its borrowing facilities. However, many small businesses
have very little to spare, and they rely on their customers
to be prompt with their payments to the business. This can affect
the ability to pay suppliers, rent, rates, wages, and to
meet customers' requirements. Young businesses often fail to communicate
their terms and conditions assertively when taking new orders,
causing problems later on.
- Sales. Any business will face difficulties if sales aren't
profitable. A common fault is pricing goods or services too
low, forgetting that although the profit margin might look good, a
lot of sales are required just to cover the overheads. However,
success can also bring its own problems. When a business
sells more products or services than its working capital facilities
can cope with, it is in danger of overtrading, the result
of which is insufficient cash.
- Investment. Beyond their own investment, most new firms
rely heavily on their bank overdraft. Facing debts at start
up is normal, but puts a strain on the business from day one. A
number of loan schemes help people starting up in business,
but financial assistance after the initial few months can be harder
to find. As many new businesses face major problems in their
early years, this can increase difficulties. A lot of small
business owners avoid external financial input, feeling it limits their
independence. Unfortunately, the stability and potential
growth of the business can depend on the amount of finance available.
Bank overdrafts can only ever be seen as short-term finance,
so other options have to be explored.
A number of external issues influence business success or
failure. Markets can be unpredictable and potentially unstable.
In some cases, the product may be inappropriate for the targeted
customer group, too expensive or aimed at consumers who are
simply not interested.
Small business owners often fail to arrange training for themselves
or their employees. Reasons for this include:
- The business owner and key staff can't spare the time.
- Training is seen as an unnecessary expense (many small
business owners believe they and their staff already have
adequate skills for the job).
- Some business owners worry that employees may use training
as a route to another job.
Health or personal problems
Many small businesses are run almost single-handedly by their
owners. This can easily cause problems when nobody else can
help during times of stress, ill health or family problems.
Legislation
Complying with the law can be a major problem for small businesses.
The burden of filling in forms, staying on top of relevant
legislation and keeping up to date with new laws all put a
strain on business owners. Small businesses are subject to
much the same requirements as larger firms, making administration
costs higher in relation to business size. Occasionally, new
legislation makes it harder to reach a market or makes it too
costly to continue serving it.
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