All businesses start as small businesses and gradually grow until they become large corporations with branches all over the world. Only 5% of the businesses actually grow to become large corporations. In this article l will look at the reasons why small businesses fail. Before we look at the reasons it is pertinent to define the word business and a business.

According to professors William Pride, Robert Hughes, and Jack Kapoor, business is ‘the organized effort of individuals to produce and sell for a profit, the goods and services that satisfy society’s needs.

A business is an organization which seeks to make a profit through individuals working toward common goals.

or

A business is an organization or economic system where goods and services are exchanged for one another or for money

From the above definitions a business must provide a service, product or good that meets a need of society.

Over the years people have started businesses either voluntarily or because of loss of formal employment. Statistics show that 90% of startup or small businesses close within the first 5 years of their inception. From the first definition there are key words “organized effort of individuals” which means there should be a certain level of organization that is required within individuals to be able to be successful in the business venture. What enforces organization within a group of individuals in business is a clear segregation of duties. This is a common problem within most small businesses which leads to disorganization creeping in and eventually affecting the whole operational system.

I have noted that some small business owners have started their businesses after leaving a full time job with a fixed monthly salary and benefits. This means that this new business owner is moving from being an employee (E) to becoming a self-employed (S) person. Note that this person is going into business with a list of fixed personal expenses which include school fees, accommodation expenses, debts, transport costs etc. this means that the new business owner is expecting to meet these expenses from the business income. In reality most startup business owners fail to meet the fixed expenses they carry into their businesses. The most obvious reason being that the business is new and it does not yet have enough customers or is not yet generating enough revenue to cover its own expenses..

The end result of this situation is either the business enters into a mode where its stock levels start to go down because it will not be able to replace the goods sold. The other situation is that the owner will withdraw from the business more money than is necessary to keep the business going and most of this money will go towards meeting his or her fixed expenses.

The solution to this challenge is that before you set into business make a decision to cut your expenses or adjust yourself to the new role of being self-employed which mean you should be able to look after the business first so that the business will be able to look after you and your family. The other most common situation among small business is after paying school or college fees the business struggles to produce or to stock adequately because most of the business funds will have been used to pay the fees. I have seen this cycle in small businesses over and over again.

New business owners need to have a character change and become disciplined and patiently grow their businesses to a level beyond their previous employee income it takes some time to grow a business into profitability and a positive cash flow every month. The number one thing l would like to emphasize is to cut your personal expenses first before you can start cutting business expenses. Why personal expenses first it’s because your small business does not have any expenses to cut as yet and ironically most business owners know how to cut business expenses but fail to do the same for their personal expenses.

Small businesses also fail because of lack of training in areas they are not already skilled in or failure to get their employees trained in their various roles. An example would be someone who has been an accountant, banker, marketer etc. can find an opportunity to start a business in manufacturing. Many times such a business will lack operational efficiency because of lack of knowhow and technical skill to run the manufacturing unit effectively. Once the goods are produced the sales and marketing department have the duty to market and sell the products and again this department is either headed or run by unqualified personnel or it does not exist, the owner is doing everything by himself or herself. The result of such a situation is a poor show in the market place. The only panacea is to get the right training for each critical functional area or hire qualified personnel to do the job but don’t forget to continuously send them for training.

Another reason why small businesses fail is failure to pay taxes. There are three main taxes that every business must pay that is income tax, value added tax (VAT) and pay as you earn (PAYE). Most small business owners l have discovered that they do not understand taxation and the simple thing to do when one does not understand something is to seek professional advice from the right sources and you should be prepared to pay for the service. Many have fallen prey to pseudo tax consultants purporting to offer tax services yet they do not understand and know how to apply the tax laws.

Some business owners fear the taxman and always try to do business in obscurity for fear of being detected by the taxman. The downside of this way of doing business is that they always deal with small clients who give them peanut business and lose out on big opportunities from clients who want to deal with tax compliant suppliers.

An understanding of the tax laws is critical for the growth of any business. Governments are now charging less tax for corporates for example the United States reduced corporate income tax from 35% to 21% and in Zimbabwe it is 25% plus 3% Aids levy. These rates are below what individual employees pay. The highly paid employees pay up to 50% income tax.

Small businesses have been penalized by the taxman for failure to declare the correct income, underpaying tax due, paying the tax due late without prior arrangement with the taxman. Value added tax is a tax that is administered under the VAT Act and many times small businesses have failed to correctly apply this indirect tax in their businesses and have as a result attracted huge tax bills that they are unable to pay and with the end result being folding the business.

With the world fast becoming a global village coupled with the removal of trade barriers in most markets there is no reason why a disciplined business person should close down because of failure to run the business. There are a lot of business support services that one can turn to in time of need. It will be unthinkable for someone to get lost while using a GPRS, if this happens its either you are not following the instructions it is giving you or you have switched it off. In your line of business get your own GPRS and follow what it tells you.

Innocent Machabe is a Registered Public Accountant R.PAcc. (Z), ACCA. He has a wealth of experience in working with businesses in manufacturing, retail and service industry. His work experience covers working capital management, business advisory, preparation of financial statements, internal audit, tax planning, training.