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6 Reasons Why Small Businesses Fail
6 Reasons Why Small Businesses Fail
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Money Management

6 Reasons Why Small Businesses Fail

Money254
Ian Job
August 24, 2022

Many small businesses in Kenya have one thing in common - they fail before they even start or stabilize. Statistics state that about 20% of small businesses fail within their first year. 30% of businesses fail before the end of the second year. By the end of the fifth year, around half of them will have failed. And, at the end of the decade, only 30% of businesses will still be in operation, reflecting a 70% failure rate.

Granted, starting a business is not easy. It's a massive feat in itself. Yet, it would help if you didn't spend any spare time basking in the initial achievement. The prolonged excitement could also be why your business wobbles in the first place. 

Here's why small businesses fail even when the economic environment they are in flourishes. 

1. Lack of a Well-Defined Vision for the Business

What is a business vision? 

It is a mental image of what you want for your business. It consists of goals, objectives, and aspirations. An excellent business vision helps identify gaps and strives to meet needs within the market. 

On the contrary, most small businesses lack this approach and are aimless from the start. They lack a strong foundation and many start for the wrong reasons. It's possible for someone to start a business with a herd mentality, replicating what others are doing and expecting similar results.

Perhaps the plan was to start with the intention of making a lot of money without putting in the necessary time, money, patience, and dedication. Unfortunately, that is not how things work.

For any business to succeed, it should have a well-defined vision. Sometimes, making a profit from the business may be secondary until it stabilises and begins an upward trajectory.

It is also probable that such businesses lack a strategy plan that evaluates the overall view of the venture. Such businesses can fail due to a lack of effective SWOT analysis and budgetary considerations.

SWOT is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats.

The strengths and weaknesses of your business are aspects over which you have some control and can make changes. Your team members, intellectual property and patents, and location are examples.

Outside of your business, events in the industry create threats and opportunities. Opportunities and threats can be grabbed, and steps can be taken to prevent them, but they cannot be changed. Examples include competitors, raw material pricing, and customer purchasing patterns.

Business vision is also dependent on leadership. If your business is lacks good leadership, how can you make proper management decisions? Poor leadership, being clueless about critical aspects of the business, such as operations and marketing, can quickly make it crumble. 

Read Also: All You Need to Know About Business Structures

2. Inadequate Operational Funds

Most small businesses in Kenya suffer from a lack of operational capital. Again, many new business initiatives underestimate the importance of the financial component before starting.

They quickly discover that overhead expenditures, employee salaries, and utilities consume more money than anticipated.

Small businesses can only succeed if they undertake thorough financial analysis on their new venture. Only then can they develop a practical plan that satisfies their businesses's financial needs.

The research will also show you how much money you need to put into the business before it becomes profitable. Most financial experts believe that it would take two to three years for new businesses to stabilise and experience sufficient cash inflows.

With this knowledge, you set aside finances to keep you going until you have enough sales to support you.

The truth is that many businesses may be out of touch with their business's outflows and inflows. It is a disconnect that leads to numerous financial shortages, causing a business to go bankrupt and cease operations.

Read Also: Loans For Start-Ups in Kenya

3. Failure to Pay Attention to the Buyer Persona

Some small businesses ignore key strategic aspects such as product specialization and niche building. Focusing on demographic groups and locations helps to identify potential customers, their bases, and critical interests. Knowing your target market will enable you to customise your products/services to meet their needs.

You cannot understand what people desire until you have a specialisation. For example, while some clients may like your products/services, you can only keep them if you supply the products they have requested.

People are naturally impatient, and if you slug, they will swiftly move on to a competitor who responds and gives what they require.

Meanwhile, in order to thrive, small businesses should be willing to go the extra mile to identify potential clients.

Create inroads, engage them, and bring them on board if they are on social media. If you are not implementing any of the above, your firm may not be able to endure market expectations and pressures. It will undoubtedly fold sooner rather than later.

 Read Also: How to Start a Business; Step-By-Step

4. Failure to Prioritise Market Research 

Overconfidence in your abilities can sabotage your well-laid plans, especially if you set up a small business for the first time. On the other hand, research and exposure will help you to understand the market better. 

Here are some of the critical elements small companies fail to research on that can lead to failure;

  • The level of local market saturation: oversaturation means that your products/services may not sell as well as you had hoped.
  • The costs of a new business venture: underestimating the costs is why many of them fail within the first year.
  • Customer and competitor profile ignorance: research can lead you to where and who your consumers are. It also indicates who your competitors are and what they are doing differently.

In general, ignoring the value of preceding research is bad for a business. The power of knowledge is critical to entering, remaining, and prospering in the market.

 Read Also: 10 Profitable One-Person Business Ideas to Try in Kenya

5. Lack of Innovation

What are you doing different? 

The thing about innovation and originality is that they allow you to stand out and be unique and easily stay competitive while capturing a sizable market share. Innovation allows you to carve yourself a market niche while standing out from the crowd. 

An innovative small business can anticipate and capitalise on rapid changes. Without innovation a  company cannot grow. 

Small businesses that fail to innovate quickly lose touch with their customers. They fail to create unique products or services on demand, therefore making it hard for them to compete well in the market.

Sluggishness and failure to make an impression are enough to connect such a venture to the statistical data of failing businesses.

6. Lack of Effective Marketing Skills  

Planning early marketing campaigns is the trick successful businesses use to secure their market share. Proper product marketing creates referrals and repeat business clients. It also establishes customer loyalty.

Loyal customers are powerful. They will sing your praises and write the most amazing reviews about your business.

Small Kenyan enterprises, however, fall short in this regard. There are numerous reasons why marketing and the business fail. One,  most small businesses start with a limited budget and prefer to perform their own marketing to save every shilling.

But that shouldn't be an excuse not to advertise appropriately. Essential marketing doesn't have to consume a huge budget. 

Nevertheless, this should not be used as an excuse to not advertise appropriately. Essential marketing does not have to be expensive. It is basically about how you sell out your business. 

Some businesses fail due to poor customer relations, poor communication, lack of interpersonal skills, and a general negative attitude toward potential customers.

WRAPPING UP

Although business creation is at an all-time low in the history of Kenyan SMEs, that shouldn't stop you from building a business.

A well-thought-out business plan, niche, and business specialisation can help you hold solid in turbulent times. Again, the key is to begin small and learn the ropes as you progress.

All the best!

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