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Reasons Small Businesses Fail

5 Biggest Reasons Small Businesses Fail – And What To Do About It.

No start-up business launches with the knowledge of ultimate failure, yet so many small companies crash within the first year of opening. According to a study by The Small Enterprise Development Agency (SEDA: 2007), a subsidiary of The Department of Trade and Industry, South Africa has one of the highest failure rates of new SMEs in the world, at an estimated 75%.

That is an astounding percentage of small business failures, which leads us to question – why? Well, let’s take a look at some of the biggest mistakes that small business owners can make and how these can be avoided to insure a successful and fruitful business.

Starting for the wrong reasons

Like anything in life, everything you do has an impact on you and the people around you. If you start a business for the wrong reasons, such as to make more money, to be your own boss and to gain some extra time in your day, it is simply not enough. Some business are started in desperation or the need to make money quickly, and this is possibly the most dangerous of all the reasons to start a new business. It takes time, effort and long-term commitment to gain some return on a business and you need to have your head, and your heart, in the right place.

You may find ideas from other successful businesses, sourcing out what worked for them and applying the same methods, but this does not always work. In many cases, an owner is the business and people work differently to find their strengths and make their marks on an industry. What worked for her, may not work for you. Find your niche, your passion and your personal way of working and you may have a chance at succeeding.

According to Robert Buys, Senior Manager at Seda’s Enterprise Development Division: “You need to have a passion for the industry that you are going into to sustain you through the tough times, so don’t go into business for the wrong reasons.”

Lack of research and planning

The most important document that any business has, is its business plan. You simply cannot go ahead with starting a new business if you have not done the work. You need to have a great (not just good) idea, a strong business purpose (fulfil a market need) and a plan that outlines where you are going and how you are going to get there. Research is the first and possibly most crucial ingredient to new business success.

Writing a business plan forces you to investigate every aspect of your idea. A business plan that is built on realistic, up-to-date information and calculated, researched statistics can help you ensure that your business is more likely to succeed than to fail. Spend time on it, even if it means pushing out the launch of your business, be realistic about your strengths and weaknesses, find the support you need to help you build the business you want. In other words, plan, plan, plan. If you put in the work, you may reap the reward.

Insufficient Market Knowledge or Lack of a Differentiator

The industry and target market that you pan to enter is crucial to your business succeeding. You need to understand where you are, what you are immersing yourself into and how you can make your mark in the industry. You need be up-to-date with the market, the needs and services that are currently being supplied and simply, what the people want from that market sector at the time.

You should be continuously researching the market. Keep up with what your competitors are doing, make sure to be on-top of the latest trends and technologies within your market and then find a unique differentiator for your business. Determine your Unique Value Proposition (UVP) by finding unique qualities, services or characteristics of your business that can set you apart from your competitors. Once you find you UVP, make it a priority focus in your business strategy and marketing techniques and make sure it absolutely clear to your customers and to your employees.

Low funding or poor money management

Countless prospective entrepreneurs do not understand the financial requirements and obligations of a business, including aspects such as tax obligations, financial costing, pricing strategies, financial control and VAT. Furthermore, many business owners find it difficult to get a handle on the difference between profit and cash flow.

Without new investment flowing into the business, many companies will find it difficult to grow, even if they are making a profit from their services and products. Check out an article we published emphasising the difference between profit and cash flow and how you can avoid the pitfalls.

Even if you are not financially trained, you get around this hurdle by simply asking for help. Qualified accountants should be used before you start your business. They can advise you on an appropriate cash flow planning for your business, how much capital you need to get your business off the ground and how to manage your finances once the business is running.

Poor leadership and unwillingness to delegate

Entrepreneurs are renowned for their ability to work independently and often take on too many tasks they believe they can do better than anyone else. Even if this was true, this particular kind of attitude can lead to a complete business and personal burn-out.

Yes, being a strong and skilled business owner can get you far, but there is more to success of a business than just the owner. A great leader knows the need to hire the right people. People that you can delegate to, that you can trust with responsibility and that you believe can help carry your business forward. A business owner should have the time to focus on the big picture of the company – expanding your customer reach, growing your business model, strategizing your future endeavours and constantly improving your customer experience.

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