Small businesses continue to form the backbone of the US economy though the rate of their failure has escalated the past few years. This trend occurs because of many factors both internal and external; for instance, owners’ behaviors and environmental conditions among others.
According to Small Business Administration statics (SBA), the rate of success of small of business in the US is seventy percent (Schaefer, 2011). Seven out of ten businesses survive after two years of establishment and this rate is an improvement from 51 percent, which was the rate of success a few years ago.
Red flag
The main reason cited for small business failure is poor management where business owners lack the required management skills in critical areas such as purchasing, production, finance, and hiring among others (Gill, Biger, Mathur, Shah, & Bhutani, 2010, p.1). The ability to plan, control, and organize all the operations of a business lacks in most new business.
This problem is indicated by inadequate cash to meet all the expenses of the business, high turnover among employees, and failure to meet the expectations of the customers among other indicators. Insufficient capital is another common problem, which is indicated by early closure of the business due to lack of funds to meet expenses of the business.
Precautionary measures
Many people start businesses for wrong reasons with the sole aim of just making a lot of money without considering whether they have what it takes to run the business. Those intending to start a new venture need to consider whether they have the right mental stamina, passion, and determination to run the business. Management skills are also paramount and new investors need to check their ability to organize, plan and control all business operations. In addition, they need to ensure they have sufficient capital to start and run the new business until it can meet all its expenses.
Prevention from loss
The ability of small businesses to absorb loss is very low compared to that of large businesses. The owners of small businesses therefore ought to be more cautious especially when taking risks such as borrowing capital from banks and expanding the businesses.
Good management of the businesses is a key factor in preventing business loss both to the owner and to lenders. Securing the business through insurance will also help in restoring the business in case of a major loss that may occur in the course of operation. In addition, owners ought to know the right time to close their non-profit making businesses prevent accumulation of unnecessary debt.
Business succession plan
Most of the small businesses are family-owned and it is crucial to have a good succession plan to ensure that the business operates for a long time. The owner of the business needs to prepare in advance those who will takeover after he or she retires. This undertaking is important especially if the business will continue to be a family business.
The owner may also employ a manager for the business if there is no family member experienced to take over the management position. The owner of the business may take other options if he or she does not intend to keep the ownership of the business to the family; for instance, s/he might consider selling the business, buy-sell agreement transfer, private annuities, and limited family partnership among other options.
References
Gill, A., Biger, N., Mathur, N., Shah, C., & Bhutani, I. (2010). Factors That Affect Canadian Propensity To Grow And Expand Small Business. Business & Economics Journal, 6, 1-10.
Schaefer, P. (2011). Small Business Administration statics (SBA): The seven pitfalls of business failure and how to avoid them. Web.