It was once said that nothing in life is certain except death and taxes. The same can be said for the world of business, especially if your business is a small enterprise subject to a variety of threats. It is easy to generalise why SMEs fail or are forced to cease trading, the most obvious cause of failure being insufficient funds. Although this may be correct, small business owners must examine why this is happening in order to get to the root of the problem before it’s too late.

The Top 10 causes of failure in SMEs are as follows:

  • Cash flow problems – Small businesses that should have no liquidity issues can find themselves struggling due to poor cash flow management.
  • Lack of understanding about the market – Small business owners get carried away with their passion and fail to stop to do the appropriate research about their competitors, demand, the consumer and the market.
  • Lack of liquidity – Lack of capital can reduce options as far as expansion is concerned, however lack of liquidity caused by bad debts and failure to collect accounts receivable can eat into the day-to-day ebb and flow of cash that is used to run the company and allows it to trade.
  • Wrong people – If the business takes on a person whose values are not in line with the objectives of the business, this can prevent growth and stunt productivity. When considering taking on someone new into your small business, try to find a way of collaborating with them before formalising matters into something more concrete. If there is any indication from this collaboration that they conduct themselves differently to how you feel is most beneficial to your company, proceed with caution.
  • Lack of financial understanding – Often individuals and small groups are passionate about their idea but lack the necessary financial understanding needed to fully appreciate where the business stands financially at any given point. A clear, in depth understanding of key financial drivers such as gross and net profit margins and the break-even point.
  • Not having a plan B – Making alternative arrangements and having countermeasures in place should anything go wrong will mean that you are well prepared to handle anything unexpected, however many small business fail to do this.
  • Cash is king – Contingency budgets and putting profit back into your business can help to finance any unexpected costs and allow flexibility as well as supporting plans for steady growth. Small business owners often fail to see the importance of doing this.
  • Failure to react to change – The smallest changes to the market, competitor’s actions and sometimes factors which seem completely unrelated can cause changes in demand. If businesses fail to react to these changes, this could damage reputation, cost time and money or both.
  • Incorrect pricing – Whether you under or over estimate the value of your product, incorrect pricing is a sure way to not gain the most out of your company.
  • Unrealistic anticipation of cash flow – If you give a customer 30 days to pay and then plan around them paying within 10, this is unrealistic. The more honest you are with yourself about your cash flow, the less likely you are find yourself in hot water.