5 reasons why South African small businesses fail

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Reasons why small businesses fail and what to do about it:

Introduction:

In our first blog post we spoke about the importance of having a business plan and how having one increases your odds of success. We made it clear that small business failure is the norm, not the exception and so one has to be working with this reality at the back of their head. In this post we look at 5 common reasons why small businesses fail, and how you as a small business owner can work your way around these common pitfalls.

There are numerous studies and articles that have been written on the topic. A simple Google search will provide you with numerous results on the topic. For the purpose of this post, we are only looking at common reasons across the board. 

Why do small businesses fail? 5 common reasons:

What to do about it?

As a business owner you want your business to be sustainable over a long period of time. Perhaps you want the business to sustain you in this lifetime or perhaps you want it to continue sustaining your children and their children going forward. Some brilliant business owners have been able to build businesses that have lasted 100 years or more. Wouldn’t this be fantastic for you, your family, and your community? But even if it is not a 100 years of business you are after – we have to understand that doing successful business is a science. There is the right way to do business, and there are many wrong ways to do it. You are looking for that tiny path and very tiny gate that leads to paradise. And finding it won’t happen overnight. It is a process, and the process takes time. You must fall in love with the process, not just the end result. 

With that said, you have now seen 5 common reasons why small businesses fail. Perhaps 1, 2, or even all 5 resonate with you. The good news is, there is something to do about it. The bad news is, it will require you to challenge your deeply held beliefs and to start bringing in changes to how you do business. You want to reduce the chances your business will fail and increase your odds of success. 

Reason 1: Lack of adequate funding

A small business owner can raise funds in many different ways. With technology there are many new inventive ways that you can do this, incl. crowdfunding. Lets consider some common ways you can raise funds:

On top of these funding sources there are numerous government interventions. They all have their funding criteria (i.e. women, individuals from previously disadvantaged backgrounds, certain industries, etc.) and terms of funding (i.e., grants, low interest loans, etc.). A wise business owner will ensure that they research these initiatives and see which ones are suitable for their business. 

But all of this has something to do with money. Which means, you have to know your money. Many business owners have accepted undesirable terms of funding and found their businesses struggling as a result. Getting funding from the wrong source can be very detrimental to your business. For example, a loan requires payment of specific amounts on specific dates – and failure to meet such conditions is a default and can result in the creditor (the lender) requesting a full payment of the total outstanding loan amount. And we are not even talking about interest payments and the interest rate. Now this is a huge business risk depending on the type of business. To be able to meet these specific payment terms, you need to have a business that can make the money in time to make these payments. This means having an adequate financial management system that shows you not just your present and past incomes and expenses, but a system that can reliably predict your future incomes and expenses to see if you can afford such a payment arrangement. When businesses fail to meet their credit terms – they usually have to file for bankruptcy (a story for another day).

But it’s not just loans that can be detrimental to your business. Even investors (i.e., angel investors and venture capitalists) have their own terms and conditions which require a proper understanding of how money works. A creditor can charge you a very high interest rate to fund you, but an investor can charge you a lot of equity (i.e., your company ownership) to fund you. As a small business owner you want to spend as little as you can to get the funding you need. Even when you are funding the business from your own cash and assets. You need to ensure that you are spending money to make more money, and not naively burning money. You want to ensure that you are making the most out of every buck. 

Knowing your money is a simple way of saying you are financially literate. Either you or your business partner have to be financially literate. Someone in your business has to understand money, money management systems (i.e., an accounting system), and all the nuances involved in managing money.

Reason 2: Poor management

There are certain processes and routines that happen every day, week, month, quarterly and annually in every business. Such as, paying staff members, marketing your products or services, filing your tax returns, maintenance of business assets, etc. The job of management is to ensure that all these regular routine activities are done properly and on time. Businesses that are able to master daily routines are the ones who are able to consistently produce exceptional and predictable results for their clients.  This is critical in creating loyal customers who buy from you repeatedly. You know exactly what you will get from McDonald's for example. You have been getting it for years, you can get it today, and if you go there 5 years from now – you will get the same result. 

Management depends on the past. That is, management depends on the actions that have been proven to work before. McDonald's will tell all their staff members – this is how we make a Big Mac. They know this from the supplier they buns from – all the way to how you press the burger in the kitchen. There is the right temperature and time on the pan that they follow. Management relies on systems and processes to do their work properly. They make use of technology to automate some of these processes. For example, you can now order on a machine at McDonald's. This saves the company a lot of money on employee costs but also ensures that they produce a consistent result over time. Most of these businesses have service manuals that their managers can look to, and training material for their staff members to follow.  

Your business is no different. There are specific actions that must happen regularly. You have to be a good business manager to do this. Discipline is absolutely critical. You must know what needs to be done and by when. And you need a system that ensures that you do it and on time. 

Leadership is about strategy and strategy is about predicting the future. If I do this - this will happen. Leaders are the visionaries in business. They know how each element of the business affect overall business success. They know the environment and the industry the business is in. They spend their time contemplating the future, and studying what consequences their present day actions will produce. They study cause and effect. A true leader knows what is going to happen before it happens. And they set themselves up to take advantage of the opportunities that are coming, and ready themselves to deal with whatever obstacles may arise. 

Your business needs your leadership skills. When you spend most of your time thinking about the past (what you did wrong or right) or the present (all the work you must do today) – you are neglecting the future. When most of your days are spent dealing with emergencies – know you are doing something wrong in the leadership aspect. 

Leadership and management require skill. And all skills can be learnt, practiced, and improved upon. There are many books, videos, and many examples on this. Take your time and build upon your craft. I’m not saying you should do everything by yourself but you need to look at your business as a whole and see what skills are missing. You can then try to do it, or get a business partner who can do it, or appoint an external service provider or even employ someone with these skills. At the end of the day, just ensure your business is not missing any leadership and managerial skills.

Reason 3: Lack of market demand

Before starting a business you need to ask yourself a very important question: Why am I in business? What is the whole point of you doing this? The reason cannot simply be about yourself, all businesses exist to serve customers.

Each business exists to solve a problem that a customer has. The aim is to solve this problem at a profit. The profit is the result of solving the problem, and so the main focus for the business owner is the customer problem. Lacking demand for your services or products has something to do with the problem you are solving, and how you are solving it.

Are you solving a really painful problem for the customer? Is this a problem that the customer immediately wants to see resolved? Is the customer willing to pay you to resolve the problem? Are they willing to pay you a premium price to solve it? How many others share this problem? Is this a problem a lot of people are experiencing? The more painful the problem is and the higher the number of people who share it – the more demand you can expect for your product or service. But you still need to do a lot of things right. Who is the solution for? When you know exactly who the solution is for, the easier it is for you to talk directly to them in a language they understand. 

Market research can not be understated. As a small business owner, you are not only competing with small businesses but with large global companies that have a lot of money on their side. You do not have a lot of money on your side. But even these large businesses make it a point that they know exactly who their customer is and how they are going to reach them. But you have an advantage over them. You are small and so you can talk directly to your customers. You can ask them questions and find out what they do, and why they do what they do. You can follow up on them and see whether they do live up to their words or not. 

No matter how small your business is – you have to be engaged in market research. Social media and the internet has made this process much easier and cheaper to do.

Reason 4: Competition

Most small businesses are doing the same thing other businesses are doing. You are not inventing a new product or service. What most of us are doing is something that others are already doing. A spaza shop owner is doing the same thing Pick N Pay is doing. As a bakery, you are not reinventing cake – cake has long been out there. And so, since most of us are not reinventing the wheel – the question to answer is – why you? Why should someone buy specifically from you when what you have to offer, they can get it from someone else? 

Your answer can’t be best quality. Any business worth its salt ensures it delivers a quality product or service. Don’t tell us you are the leading expert in your field – leading experts do not have to tell us that, we all know who they are. What makes your product or service offering unique? Why should we buy from you? 

The key is to differentiate yourself, and you can do this in many ways. For now, we will simply focus on a niche (a specialized segment in a market). The riches are in the niches they say. You are a small business and so your focus cannot be everyone. Large businesses can afford to advertise to the whole country as they sit and watch Skeem Saam you do not have those funds. And that is where niches help. 

When you pick a specific segment in the market – you can tailor your marketing to this particular niche and take control over it. For example, your hairdresser may be focused on black high school girls. Your bakery may be focused on creches in rural areas. Your nail salon may focus on nurses. All these groups of people have their own quirks and language. They also appreciate different things. The high school girls don’t have much money perhaps and may appreciate free WI-FI as they wait for your service.  The creches may only be interested in throwing parties for the kids and so may buy bulk and appreciate your staff being in a party mood when they deliver the goods.

What niches provide is a wonderful way to differentiate yourself. Done correctly – you can stand out from the crowd and be known as the leading expert on your particular niche. 

Reason 5: legal and regulatory issues

If you are going to use the fact that you are a small business to run away from doing legal business – you are most likely going to remain small forever. And that is not the business you want to have. You have dreams and you want to achieve them – I highly doubt you will achieve them making the same money today as you made 3 years ago. The goal should always be to run a legal and ethical business establishment. Ok, now that we have turned away the criminals – lets continue. 

The legal environment not only requires things from you, but it also provides you with some protection. As a legal entity (i.e., a registered business) you have both rights and responsibilities. Think about it – the country provides you with an environment and opportunities to do business and make money for yourself and family. The country is not asking for much if in return, it requires you to comply with its laws and regulations. It simply wants to maintain law and order – without which, you will not be able to do what you do. I’m not saying that the government is perfect and that the laws and regulations are not tedious – I’m just saying that as responsible citizens we must respect authority. We shouldn’t be breaking laws intentionally. 

Now as a business leader you need to be aware of the environment you are doing business in. The environment includes its laws and regulations. All companies are registered under the Companies Act of 2008. Not only the companies act, but there are many other supporting legislations, i.e., income tax act, the basic conditions of employment act of 1997, etc. all these have a say on how you do business and how you profit from it. You can plead ignorance– but the legal system eventually delivers justice. 

You must know the legal environment you are dealing in. Not saying you should become a lawyer or an expert at law. But as a small business owner you are most likely unable to cover large legal fees as yet. And so, you must at least get an idea of the laws and regulations that you must comply with as you get your business started, i.e., how to register the business with CIPC, how to file an annual return, provisional tax, etc. For example, if you are not aware you are liable for provisional tax – you may not save the money required to make this payment. By the time you get an Accountant to do your books – you have already chowed the money you should have used to pay the tax man. 

Having a basic understanding of the legal environment is simply knowing the do’s and don’ts of the game – which will go a long way to helping you win. 

Conclusion:

Small businesses fail and there are reasons why they do. We have now covered 5 of some of the common reasons and have discussed some of the ways you can address these causes. The point is to reduce your odds of failure and increase your chances of success.

We have simply covered some of the things you can do to address these issues, but we hope this has opened your mind up for further learning and research in these areas. There are no simple answers to these complex problems. This is just the start.

See you on the next blog post.