Business success is evaluated by the ability of the business entity to meet present and future demand of the business with the evaluation based on balanced score card. There are many warning signs of business failure that should not be ignored by entrepreneurs or agent managing the business progress.
Business consultants note that when business managers take proactive steps and seek advice, they will be immune to the possible downturns of the economy. Research report proclaimed that not less than seventy percent of entrepreneurs that start businesses fail or struggle to survive within the first two years of operation if the entity is not well manage professionally to overcome the immediate teething challenging that associated with the business growth.
A research by Basil 2005 indicates that most Small and Medium Enterprises, particularly in Nigeria, die within their first five years of existence; another smaller percentage goes into extinction between the sixth and tenth year, while only about five per cent to 10 per cent of young companies survive, thrive and grow to maturity.
Entrepreneurs often complain that the major challenge they encounter is raising capital but research emphasize that business success don’t only require capital but professional strategy implementation.
On this write up, I will be discussing with my esteem readers, key factors that often lead to business failure and possibly sink them if not professionally managed.
Funding an unprofitable venture
According to the Robert Kiyosaki, a successful business mogul and financial expert, he proclaimed that, all business ideas are good but not all are profitable at long run.
He says entrepreneurs who are eager to make money fail to use comprehensive strategies and think of the continuous profitability prospects of their enterprises before putting all their resources into them.
In his book, Fire Yourself, he emphasized the need to write out a well-thought-out business plan that gives the skeletal picture of what the enterprise aims to achieve, how it intends to achieve them and the resources that will be required. He adds that most business proposals are not bankable because they fail to answer crucial and futuristic questions that support continuous sustainability.
Robert advice today’s and to-be entrepreneurs that: “it’s important to choose an industry where you can achieve sustainable growth. Having a positive cash flow is very important. It takes more than a good idea and passion to stay in business.”
In the book written by Godwin Ehigiamusoe, titled: The Mind Behind LAPO, he noted that when a new business breaks even, the next decision most entrepreneurs make is to add other services to the existing one without building and strengthening the profitable one.
However, he says slow and steady growth is more sustainable than unsustainable expansion growth. He advised that pursuing all kinds of businesses can drain the capital and actually reduce overall profitability. It was also advised that the additional costs incurred on new inventories to meet new customer demand may eventually lead to loss. Moreover, if the economy crumbles, loans and other funds may not be repaid.
Lack of legal backing
Business can be formed as a sole proprietorship, a partnership or a limited liability company. While the sole proprietor and the partners are not usually separated from their businesses, the owners of a limited liability company are different from their company.
A registered business is a legal entity separate from the shareholders or managers and its affairs must be separate from the owners’ personal affairs. This includes the bank accounts and other assets and liabilities of the company.
Unfortunately in Nigeria, most small business owners don’t separate their companies from themselves. They are the chairmen or chief executive officers, accountant, auditor and thus, have the right to take cash from the company accounts for personal use without refund. This is acclaimed by professional business manager as bad business management practices.
Accordingly, a business owner, who also works as an employee of his company, must pay himself a salary. While such a salary must be good enough, it must also be affordable by the company. Aside salary, a business owner working as an employee of the company can be entitled to bonuses and profit sharing just like the other employees. He is, however, entitled to dividend as a shareholder of the company.
It was advised that small businesses should stop the habit of unbridled withdrawal of funds from company bank accounts for personal use, which has no potential of growing the business.
Diversion of funds
Experts say taking business risks has its own reward because it may cause business owners to become more creative and expose them to other opportunities and new challenges, but the outcome may not be guaranteed if some risk management skills is not used.
The quest to make quick money has been the major undoing of many business owners, who venture into other business opportunities they don’t even know anything about.
Although business owners are expected to be risk takers, it does not mean they should jeopardize the destinies of their companies and the other stakeholders by diverting funds meant for the business into a completely different business or a non-operating project without sound and objective planning.
Diversifying into other ventures must only be after a careful analysis of the opportunities and how such investment will affect the well-being of the existing business lines. Businesses live on cash and any attempt by business managers to starve it of cash, due to greedy re-investment in other opportunities outside the business line, can be very destructive.
The goal of business progress and sustainability can be predetermined by rate of customer influx to the business entity and their purchase turnover rate. An entity that does not give premium customer service to its customer is doomed to fail within shortest period of existence.
Professionals advised that periodic entity valuation based on customer perspective and evaluation of their demand rate with their purchasing power can determine entity business sustainability. All employee of a business entity need to be trained on how to give premium service and best ways to ensure customer satisfaction without undermining the policy of the organization and compliance to supervisory bodies/agents directives.
In conclusion, it comprehensively advice that all the above mentioned tips should be understand and serve as guide to decision making in order to avoid any probable disguise to business failure.
Author: Oyeniyi Ayodeji ( Route to Business Failure)
About the author
Oyeniyi Ayodeji, a pioneer graduate of LAPO-AFOS Foundation management trainee programme. He is currently an employee of LAPO Micro-finance Bank Limited with vast experience in corporate and investment banking operations with applicable industry regulation, practical knowledge of MSME financing and market environment, understanding of strategic planning, business development and investment portfolio management, risk management and analysis, credit monitoring, project and stakeholders management. His interest also includes financial advisory services, agricultural financing, project management and intellectual public speaking.
He holds a Bachelor of Technology in Agricultural Economics and Extension from Ladoke Akintola University of Technology, Nigeria, Proficiency Certificate in Management from Nigerian Institute of Management (Chartered); he is also a Certified Micro-finance Banker from Chartered Institute of Bankers of Nigeria (CIBN). Ayodeji is a certified Micro-finance Trainer from Tokyo Development Learning Center, the World Bank and Asian Development Bank Institute (MFTOT 10, 2015).