Why businesses fail, By Bolutife Oluwadele

Why businesses fail, By Bolutife Oluwadele

Wrong investment decisions are always capable of wreaking havoc on a company, especially when such investments are fundamental to the success of such a company. The standard type of wrong investment decision is using short term funds to finance long-term projects. In actual fact, this happens to be the bane of many a Nigerian business. Honestly, it is such a critical matter that any organisation that ignores this fact does so at its own risk.

It is often surprising that once known and flourishing companies suddenly went under and ceased to operate as a result of what seems to be even very funny atimes.

The rate at which businesses fail, especially in the developing economies, calls for severe concern, and hence efforts should be made to, at least, reduce these incidences of business failure. The late 1980s and the early 1990s, no doubt, signaled a new era in the formation of various companies, most notably in the services industry. The ‘revolution’ of the finance houses has not left our memories, and for those who lost money, they can hardly forget that period! Even for those of us who were not direct victims, the memory of that era can hardly be wiped off completely. We can still recollect the accusations and counter-accusations by the then military administrators and even civilian governors on the involvement of those finance houses in many shoddy deals. It is hard to forget, one dares to say. That the so-called “golden era” of the finance houses went down so ingloriously is a lesson not to be forgotten.

Indeed, some of the issues were not be peculiar to the finance houses, and they extended to other industries at an even more alarming proportion. However, the attention given to the collapse of finance houses is hardly comparable to that of any industry in our clime.

The logical question to ask, therefore, is why do these businesses fail at the rate they do?

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The success of any setup or venture is a combination of many factors, including but not limited to the proper harnessing of its various resources to achieve the desired ends. These resources range from human to non-human, ideally requiring a proper mix for sustainable growth and development. At the centre of such is the process of decision-making and its implementation. This is the apt summation of the essential ingredients for success; however, the focus is on the other side of the coin.

No doubt, many reasons can be adduced to explain the incidences of business failure, taking cognisance of the peculiarities of individual organisations in terms of the type of industry, the scope of operation, and quality of management. Some of these reasons, which have general appeal, will be looked into.

Mismanagement constitutes a primary reason for business failure. The term ‘mismanagement’ should not be seen from a narrow perspective alone. Mismanagement entails much more than the misappropriation of funds and fraudulent practices to include taking wrong decisions at the right time or ‘proper’ decisions at the wrong time. It includes the inability of management to derive the best outcomes from the available resources and extends to the incompetency of operations. Furthermore, it includes the aspect of leaving things to chances when decisive action should be taken. It even seems that all other reasons for business failure will have a ready home under the broad umbrella of mismanagement.

Wrong investment decisions are always capable of wreaking havoc on a company, especially when such investments are fundamental to the success of such a company. The standard type of wrong investment decision is using short term funds to finance long-term projects. In actual fact, this happens to be the bane of many a Nigerian business. Honestly, it is such a critical matter that any organisation that ignores this fact does so at its own risk.

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Personnel management, until recent times, is often neglected by many organisations  Recruitment is made without due recognition of the needs and means of the organisation  Faulty personnel management will deal a heavy blow through suboptimal results when the round pegs are not found in the round holes. This leads to a common situation in which people are not engaged in the positions they are most suitable for. Apart from this, it may lead to the employment of people who are not even required, thereby increasing overhead costs without the associated benefits. The syndrome of ‘finding jobs for the boys’ is a total negation of appropriate personnel management towards achieving efficiency and effectiveness from the human resources deployed by an organisation through its labour force.

Often, instances abound whereby personnel management does not consider the critical issues such as qualification, experience, or personal traits before certain appointments are made. This singular mistake has spelled doom for many organisations, leading to their total collapse.

In modern times, with improved scholarship (sound education) on business, attention is now being paid to working capital management. Ineffective working capital management could lead to the loss of markets, suppliers’ credit, and goodwill, among others. A company that perpetually fails to honour the demand notice of its suppliers is doing that at its own risk. Apart from that, a situation where the stock level is not adequately planned may lead to a shortage of stocks (inventories), which culminate in the loss of good customers. Excess inventories may unnecessarily tie down capital that would otherwise be utilised for profitable projects on the other spectrum. Whichever way, there should be in place a proper balance to achieve better results.

Excessive managerial control stiffens initiatives and the company loses in the long run. Some companies, especially small-scale businesses, are in the habit of having only one person taking the decisions without recourse to the ideas or opinions of others. Such persons regard themselves as experts on every issue, which is far from the reality.

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Improper record-keeping is also a signal of business failure. Record-keeping includes accounting, as well as operational records, which helps to facilitate the decision-making process. In practice, however, such records are either not kept or when kept at all, such records leave much to desire.

Asides from the above, the inconsistency of operations may lead to the collapse of otherwise thriving businesses. The common saying that ‘jack of all trades, but master of none’ becomes very apt in this regard. A company that dabbles into any business at sight will need more than sheer luck to succeed.

In fairness to some businesses that failed, there were instances of being caught unaware of economic and political factors. They could hardly do anything about these. Unfavorable government policy can cause business failure. The recent Twitter ban, for instance, may lead to some businesses failing as their customer bases may have been negatively impacted.

Economic depression always has devastating effects on the services industry, as people become increasingly lacking in the need for such services, which are adjudged not to be essential.

Businesses fail because of many other reasons, depending on their peculiar natures, but some of the above factors indicate business failures.

Bolutife Oluwadele, a chartered accountant and a public policy and administration scholar, writes from Canada. He can be reached through: bolutife.oluwadele@gmail.com

 

 

 

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