Introduction
The Small Business Administration. (2012) reports that 66% of businesses survive past the first two years of operation while only 50% survive past the first five years of operation. The Small Business Administration. (2012) also reports that these trends have endured over a long time. These findings prompt the question as to why small business are predisposed to fail. The purpose of this paper is to answer this question.
Discussion
Various reasons have been proposed to explain the failure of small businesses. Bates (2014) attributes the failure of small business to shortages in cash flow. This factor can be either the result of low sales or poor financial planning. Problems with cash flow affect the ability of the business to meet its financial obligations such as paying employees, paying its suppliers, and servicing its loans. The persistence of this problem can cause a proprietor to declare bankruptcy and close the business.
Bates (2014) also argues that ineffective cost and operational controls are responsible for the failure of many small businesses. It is true that there is a lot of initial investment to be done before a business can stabilized. However, Bates (2014) holds that proprietors need to perform a needs assessment before committing the costs to determine if they are necessary. The failure to control the costs might cause problems with cash flow, especially when the return on the investment is not immediate. Part of the poor operational practices also includes the use of revenue generated from the business for non-business related activities. The practice can lead to cash flow problems, especially when the spending is not tracked (Bates, 2014).
Bates (2014) finds that many of the small business proprietors failed to delegate certain tasks to other people when the business began stabilizing and growing. The growth of a business ushers in more responsibilities than the proprietor can handle effectively. The responsiveness of the human resource aspect is important to the sustained growth of the business. Bates (2014) recommends that proprietors hire and train more staff as the business grows. Bates (2014) also recommends that the proprietors cultivate a culture of trust with the human resource so that it is easy to delegate certain tasks to them. In addition, close monitoring and audit is required to ensure that the delegation of duties generates value for the business.
The reasons highlighted and discussed above are internal to the small businesses. Other reasons outside of the small business have also been cited as the cause of their failure. For instance, Augusta, Sandra and Yrle-Fryou (2000) argue that the failure of small business is more the result of external factors than internal factors. Some of the external factors highlighted as a cause of the failure of small businesses include the interest rates applied to the federal funds, the ratio of profits that is apportioned to the stockholders after the deduction of the income taxes, and the gross domestic product. External factors as a cause of business failure is also highlighted by Hyder & Lussier (2016), the particular context being the small businesses in Pakistan.
A similar argument is also provided by Fatoki (2014) who finds that small business in South Africa fail because of external factors. Fatoki (2014) attributes the effect of the external factors to the fact that they are beyond the control of the proprietors of the small businesses. Some of the factors highlighted include the high costs that proprietors have to meet to do business. The high costs are the results of the various permits and licenses one requires, the cost of amenities such as electricity, and the cost of supporting services. Fatoki (2014) also attributes the failure of small business to the stiff competition from establishing business. This happens especially when the business idea upon which the small businesses are based is not unique and innovative.
The lack of financing is also highlighted as a cause of the failure of small business (Fatoki, 2014). Starting a business requires a high financial investment. The money is required for the capital investment in the business as well as paying for the other prerequisites for the business. Even if the proprietor is able to finance the capital investments and the other requirements to get the business running, more money is required to finance the operations of the business. The fact that many proprietors rely on their savings to start their business predisposes the business to failure, especially when they cannot get financing after their savings are depleted.
Of importance is the interest rates that are charged by financial institutions for financing. High interest rates can contribute to the lack of financing. If the interest rates make the access to financing economically impossible, the small businesses might suffer. The proprietors might fail to look for the financing they require to keep the business in operation. Alternatively, the proprietors of the small businesses might secure the financing at the high costs. There is a probability that such a move will have negative effects on the financial situation of the business, especially if the revenue generating activities do not take off immediately.
Reflection
The most challenging part of the writing the paper was determining the references to use. There was a lot of literature on the subject area. However, most of the articles are published in websites which may not be credible. Determining whether the information presented in a given article is credible enough for use in an academic paper was very challenging. The strongest aspect of the essay is that it acknowledges and presents the different perspectives on the cause for the failures of small businesses.
References
Augusta, Y., Sandra, H., Yrle-Fryou, A. (2000). Economic Factors: Examining Why Small Businesses Fail. Journal of Business Entrepreneurship. 12(3):
Bates, J. (2014). Creation and Control of a Small Business: A step-by-step simple guide for first- time entry to the business sphere. Bloomington. Xlibris Corporation.
Fatoki, O. (2014). The Causes of the Failure of New Small and Medium Enterprises in South Africa. Mediterranean Journal of Social Sciences. 5(20): 922-927.
Hyder, S. and Lussier, R. (2016). Why businesses succeed or fail: a study on small businesses in Pakistan. Journal of Entrepreneurship in Emerging Economies, 8(1): 82-100.
Small Business Administration. (2012). Do economic or industry factors affect business survival? Retrieved from https://www.sba.gov/sites/default/files/Business-Survival.pdf
