Fatal Flaws: 10 Reasons Why SMEs Fail
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For those of us who call the UAE home, or who service the SME business sector, the number and importance of SMEs to the overall economy is well documented. The UAE provides a business environment where SMEs can thrive, and there are many success stories that provide tangible proof of this- but what about those SMEs that fail? And why does this happen?
There are many business experts, and a plethora of individual schools of thought on the areas that business owners should focus on to ensure their businesses survive (and ultimately thrive). There are, however, some key areas, which if ignored will definitely increase the likelihood of any entrepreneurial venture failing. Here are ten of them:
1. Lack of planning
Many businesses start with an idea for a product or service, which, in principle, seems certain to result in commercial success, but ultimately fails due to lack of understanding and a business plan. All small businesses need a business plan. Even those businesses that do have a business plan can fail if their plans are unrealistic and not based on accurate information. The key components of any business plan should be:
• Mission and strategy
• Development financing
• Financial objectives
• Sales and marketing strategies
• Competitor analysis including pricing
• Market summary
• Resource plan
• Financial forecasts (income statement, balance sheet, cash flow forecast, capital requirements, working capital)
• Keys to success and differentiation Bear in mind that financial institutions will invariably require a business plan if you are looking to secure additional working capital, so the time taken to develop a business plan should not be seen as a box-ticking exercise.
2. Lack of working capital
Time after time, we see business plans where owners have an unrealistic expectation about revenue and cash generation and this leads to cash crunch and failure. Other business plans focus on set-up costs, but fail to factor in the day-to-day running costs.
It is crucial to understand that most businesses take a year or two to establish themselves and during that period they will need to keep the lights on and staff paid. Taking a more prudent (some might say negative) view of your first 18-24 months of being in business will increase your chances of right sizing your working capital needs.
3. Providing too much credit to customers
All new businesses face the quandary of wanting new client sales, while also wanting to get paid. Landing that big customer order might be great for the sales reports and profit and loss statements, but if you provide them with overly generous credit terms, it could mean your business’ demise.
Before committing to any credit terms with new customers review your cash flow, and build a model which factors in late payment. If the results mean negative cash flow, you may need to go back to customer and try to negotiate more favorable terms or some form of upfront payment. If the customer is not open to negotiation, then you may need to think twice about going ahead. After all, winning business with negative cash flow implications is not good business.
4. Failure to outsource correctly
Some entrepreneurs will identify very early on in the new business process that certain tasks can be outsourced, and in general, this can be very advantageous.There are pitfalls associated with outsourcing that can be mitigated by keeping in mind some basic keys to an effective outsource:
• Don’t be tempted to go cheap
• Manage the outsourcing relationship closely
• Identify the core areas that need to be outsourced and where you lack expertise
• Understand the true costs
• Constant communication of deliverables
5. Competition (and failure to understand the competition)
Unless you are lucky enough to have developed a product that does not already have a market, you will have competition. A failure to understand your competition (and their products and pricing) will impact your business model and bottom line. As part of your business plan, you will hopefully have prepared a competitor analysis detailing their products/services and pricing. Having prepared your competitor analysis, it is good practice to update it at regular intervals to ensure it remains relevant.
6. Failure to track finances
Business owners will often focus all their early efforts on developing and selling their products and services whilst failing to track spend. Accounting is often seen as a chore when in actual fact it should be the basis for running any effective business venture. There are a number of cloud-based accounting software solutions (Xero and Quickbooks being two) that allow business owners to run their accounts easily and cheaply. You may also want to consider outsourcing your early accounting requirements to a cost effective local provider whilst your business is in growth mode.
7. Ineffective marketing
You may have developed the best product in the world but if people don’t know who you are, or where to find you, then your chances of doing business decrease measurably. It has never been easier, or more costeffective, to advertise. The advent of online marketing, social media and the now well established routes of email and websites mean that you can place and promote your product where your customers are.
8. Growing too fast
Many companies have failed after trying to grow too fast or from overtrading. Before any kind of expansion is considered, a detailed study with financial projections, manpower planning, property and technology should be prepared. Always set realistic growth targets, and expand as the business need dictates.
9. Poor management and leadership
Entrepreneurs may have great ideas but this does not always equate to good management or leadership. Ineffective management can lead to poor morale, lack of focus on key deliverables and reduced productivity. If you are not a natural leader, there are many books on leadership that can be referenced or you may want to seek out the services of a business mentor. Admitting your deficiencies from the outset, and putting a plan in place to rectify them, will give you a better chance of business success.
10. Lack of diffferentiation
USP (unique selling proposition) and UVP (unique value proposition) are terms that are used constantly in business circles but there are not many businesses that actually have either. Business plans will often include USPs/ UVPs, but upon more detailed analysis, they will not actually be unique. Think of the product/service, quality or particular characteristic that differentiates you from your competition. In simple terms being the only business of your kind to sell a particular product will differentiate you from your competition. From the beginning of your business venture, determine your value proposition, and then communicate it to all stakeholders.