Financial Times

Can your business fail?

By Nilooka Dissanayake
"If at first you succeed, try to hide your astonishment." One of my guiding principles, this applies equally to business and to personal life.

Today, let us find out why businesses fail. Business failure is a widespread phenomenon, like birth and death. If you consider the statistics, you will see that for every business that continues, nine or so others that started have perished. As a result, there should be a lot to learn from failures if experience is any measure for learning.

While everyone is ready to tell the world of their success, for personal or cultural reasons people do not like to talk about failures. It would, however, be good if those who failed try to look back and understand the causes. Often it is human nature to blame someone else - the weather, global business environment, technology obsolescence, government policy or competitors. Still, it is worthwhile to perform a "post mortem" on a failed business to see what lessons can be learned for the future. For this reason, I am constantly on the look out for such stories.

Reasons for business failures can be categorized in many ways. In fact, there are researchers all over the world working at discovering causes for business failure and whether failure can be predicted. Some have developed formulae for prediction. There are many theories for and against them. This article is an adaptation of an article published in Athwela Vyaparika Sangarawa, the Sinhala business journal a few years back.

In this article, we define failure as the inability to attain the organizational objectives. If your objective is profit, inability to make a profit within a reasonable time would be considered a business failure. These reasons can also apply equally to non-profit oriented organizations.

According to research findings of Dun and Bradstreet, the international credit rating agency, small and medium businesses can often avoid business failure by understanding why others have failed. In fact, one entrepreneur who shared his story with the writer said "Now I know how not to run a business."

These are some of the common reasons that make small businesses fail:

* Lack of a clear business plan

* Business activities are not properly organized

* Insufficient attention to the business

* Not exercising due care in dealing with suppliers

* Failure to understand your competitive position

* Weaknesses in financial management

* Poor interpersonal skills

* Insufficient knowledge in own field of business

Can they lead to the failure of your business?

Most small businesses look at business plans only as a "necessary evil" to get a bank facility. A business plan - or any plan for that matter - has to make sense in "real time" to be of any use.

The proper place for a business plan is in your mind and on your desk and even as your bedside reading - not inside the bottom drawer of your office desk where you see it only one a year. If you refer it often, then you can see what you are doing and where you are going. You would not lose track and fail to see things in context.

Small businesses lack systems and procedures and controls, often because of lack of understanding or because of sheer staff shortage.

Can these lead to the failure of your business? How can you avoid this?

Insufficient attention to business is cited by Dun and Bradstreet as a reason for failure especially in small businesses where often a single man or woman is the driving factor. Research conducted by the Athwela research unit shows that the majority of small business owners in Sri Lanka feel that they cannot afford to be away from their place of business for more than a day. If so, is it not obvious that distraction or lengthy absence leads to business failure?

Another factor is early success leading to over confidence in an entrepreneur. This in turn makes him diversify business activities and take on more than he can handle. Over trading is another reason. It is often ego more than greed that should be blamed for this situation. So please watch out.

As we have discussed before, a business is constantly engaged in tug-of-wars with customers, suppliers, competitors, status of technology and many other factors. So, being lax on any one of the areas can make you slip and fall.

Often a small business is a one-man or one-woman show. Hence, the weaknesses of the individual can directly affect their business because unlike in large organisations there will be no system to counterbalance their weakness. Poor understanding and lack of knowledge can lead to business failure. Missing out trends in the fast changing business environment and insufficient interpersonal skills can slowdown or hamper the rate of success and eventually lead to business failure.
These are some of the lessons we can learn from others who have learnt the bitter taste of failure.

If you have an experience or story that you feel could help other entrepreneurs, please share it with us. We will treat it with utmost confidence. You can reach us on ft@sundaytimes.wnl.lk or call on 074-304112.

The writer is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal), the only Sinhala management monthly targeting the small and medium sized business operators and its English version, Small Business International magazine.

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