Red flags (part 2): Non-financial reasons why small businesses fail
Business ethics
September 12, 2016Misuse of assessed losses
September 12, 2016Small businesses usually fail due to a combination of financial and non-financial reasons. The good news is that these risks can be addressed before they become a threat to the survival of the business. This article will discuss a number of non-financial risk factors that could lead to small business failure if not addressed in time.
- Lack of planning
Business plan:
Few small businesses have business plans or if there is one, it often ends up forgotten in a bottom drawer. To be of any real value, a business plan needs to be flexible and reviewed occasionally to determine if the business is still moving in the direction that the owner originally planned or if a change in direction is required.
Succession plan:
An up-to-date succession plan is vital to ensure that the business can continue if something unexpected happens e.g. losing a key employee.
- Marketing considerations
Target market:
It is crucial to define a target market to ensure that advertising is done through the right channels to reach the target market. The owner/management must stay in touch with changes in the needs and wants of their target market. Every now and then the business should re-assess whether the demand for their product or service is growing, declining or stagnating, and whether their target market has perhaps changed.
Customer base:
The risk of having one big customer is that losing them might mean closing down the business. Having a large base of small customers in addition to one big customer is much safer.
Focus on products:
Effort should be focused on marketing the most profitable products or services. This means information on how much profit is made on each transaction should be available.
Advertising channels:
Today every business probably should have a website and use the same social media platforms e.g. Twitter or Facebook, that their target market uses. If not, you will lose clients to your competition who does make use of these resources.
Overgeneralisation:
One business can’t be/do everything for every customer. Spreading yourself too thin can diminish the qualilty of service delivery.
- Inadequate management skills and experience
Lack of management skills, experience and knowledge of the business sector in which a business operates is a major cause of small business failure. If not addressed in time, poor communication skills and lack of adequate procedures and systems will be a factor that increases the chances of business failure.
- Unexpected and uncontrolled growth
A growing business can expand beyond the management resources and skills available in the business. If a current employee’s ability to manage and plan becomes insufficient due to the growth of your business, re-training the employee so that he/she is able to meet the changing demands of their work, or appointing a more qualified person should be considered.
- Incompetent personnel and poor service delivery
Repeat and referral business is where the big money lies. Customers who had a bad experience in dealing with your business, will probably not return and tell other potential customers about their negative experience.
Develop strict guidelines when hiring personnel and put new and old personnel through intensive training to ensure quality service delivery from each employee. The success of a business depends to a large extent on the owner’s attitude, ability to be objective and willingness to bring in help when needed.
If the above content raised any concerns you wish to discuss or need professional guidance on, please do not hesitate to contact any accounting office.
Reference List:
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
