Main Causes of Business Failure and Solutions

There are innumerable businesses which have not been able to see the light of day due to an equal number of reasons.

Business failure has become quite common among entrepreneurs as many successful entrepreneurs today have stories of their many failed attempts at establishing business ventures. These have become successful today because they have been able to identify the reasons for their failures and provide far-reaching solutions to these problems.

This article discusses the major causes of business failure as it has become quite rampant especially among new entrepreneurs.

Despite the failure of many businesses, there is growing knowledge on why these businesses failed as well as those things to avoid when setting up a business. These have been made available by successful entrepreneurs who themselves passed through the same challenges.

It therefore becomes necessary that new entrepreneurs study these causes (as provided in this article) towards enabling them avoid common mistakes, thereby increasing their chances of having successful businesses.

Now let’s discuss the reasons for business failure:

Inadequate Funding

This is a primary cause of business failures the world over. It has led to a lot of business having to close shop because they could not meet basic financial demands that cover vital areas of operations such as running costs, the availability of finances for the purchase of equipment and several other areas.

No matter how well planned a business is, without adequate funding, there is little that can be done towards achieving considerable growth. When starting a business, there is a buffer time during which a business is expected to be run without generating tangible profits.

During such period, there should be sufficient funding to last during this period (usually up to 6 months) before a business becomes profitable.

Having Little Knowledge on the Market and Customer Behaviour

This is very common for businesses which are rushed into without properly understanding on how they work as well as having inadequate information on customer behaviour and buying habits. This is true for all types of businesses.

It is absolutely necessary to conduct a market survey or research towards gaining a broader perspective on market forces as well as customer behaviour and buying habits. This sets the tone for developing effective products and services that meets market demands as well as client/customer expectations.

Not Being Alert to Market Trends and Technology

We are in a changing world where there is constant innovation in the way products and services are provided.

Although a business may have implemented certain steps which led to its success in the past, this will not always be the case, as times have changed in line with client expectations and innovative service delivery. Hence to keep abreast of happenings, you need to be able to know what your competitors are doing as well as what works and what doesn’t.

Also, the business should be alert to new technology in the particular industry as well as know when to exploit these.

This will be of significant help in providing an edge that will always project a business forward, allowing it to thrive in the midst of competition. This is one of the most powerful external causes of business failure.

Managing Incompetence

This step is common among failed businesses as they have had to put up with incompetent management. As businesses grow, the need for highly skilled and specialized workforce becomes necessary. Due to the lack of a skilled workforce to take the business to the next level, the business witnesses a dip in its fortunes.

However this can be avoided by conducting in-house trainings or by hiring the right people with the right qualifications to handle critical sectors of growth for the business. It is necessary to have a clear-cut knowledge of what skill sets are required for certain departments.

This enables you streamline your recruitment efforts towards attracting the right personnel.

Centralizing Every Area of Decision Making

This is another case for business failure which is quite rampant. Many times business owners believe they can handle everything by themselves. This always results in a slowing down of the decision making process at periods when these decisions will need to be immediately implemented.

Another way this leads to the failure of many businesses is that the owner is not competent enough to know exactly what steps to take in certain situations. This leads to irrational decision making that affects the business negatively.

It is necessary that the business owner focuses on his/her area of competence by overseeing the bigger picture while giving specific responsibilities to people skilled in those particular areas. This significantly reduces failure in businesses.

Failure to Plan Ahead

This point encompasses all the above-mentioned reasons for business failure. Without proper planning, there is little a business will achieve as most businesses close shop within 3 years of existence due to the lack of proper planning.

Planning has to do with almost every area of the business. It sets out the immediate, medium as well as long term goals of the business as well as definite steps which must be taken to achieve them.

Without adequate planning, a business is less likely to succeed as it would be run in a haphazard manner. Businesses which are not clearly structured will never last, and this has been the problem with many failed businesses.

It is not enough to plan ahead for a business as it could still fail if there is no proper implementation of the plans.

Hence every plan requires full implementation. The plan should also factor in changes in market dynamics which may require adjustments to be made to the plans.

Business failure is rampant due to a variety of reasons as mentioned in the above points above. To considerably reduce failure in businesses, it is necessary to identify these problems as mentioned above and deliberately set out towards addressing them.

These would ensure that business owners are able to commit their time and energy in the right place, resulting in greater productivity.


In discussing the reasons most small and medium scale businesses fail early, understanding of the concept of small and medium scale businesses or enterprises needs to happen in order to better understand this discussion properly.

An enterprise or business is firstly a unit of economic organization or activity. This is especially true of a business organization. The activities of these businesses are usually purposeful and systematic; all aimed at achieving a desired goal, which in most cases is profits.

In the light of the above explanation, small and medium scale businesses are those businesses who start out on a small or medium scale, with most having ambitious plans of eventually expanding their operations, coverage and services.

Although all begin with plans of growth, this has not always been the case, as there have been several cases of such business ventures eventually collapsing. What happened to the lofty goals and plans set by the business owners you might ask, this is the mystery this article seeks to unravel.

Slow Adaptability to Trends within the Industry

This is a major area of failure for small and medium scale businesses. Business owners that refuse to align their businesses to the current industry happenings are eventually left out of the pack as the business world is an arena that witnesses frequent changes. These changes are mostly influenced by the change in consumer behaviour.

Because consumers rule the business arena, all services and products are specifically tailored to suit or fit their taste. Some businesses even go as far as innovating new services and products and introduce or carry out research with the customers, just to test its acceptability.

Failure to follow or adapt to the trend by small and medium scale enterprises has led to their eventual fold-up. This is one of the reasons why most small and medium scale businesses fail early.

Taking Business Decisions Without Expert Advice

This is an area responsible for the failure of many businesses. Business decisions are not like our everyday decisions where we decide when to eat, sleep, and drive and so on. Any decision taken on behalf of a business has far reaching effects on how well and how far this business will do go.

Before decisions are taken on behalf of a business, experts skilled in this area should be consulted for advice. In fact, business decisions should never be taken in the absence of experts. Taking unilateral decisions without adequate knowledge has resulted in many small and medium scale businesses dying early.

Lack of Necessary Business Skills

This is a sure recipe for business failure. Any entrepreneur with inadequate skills to pilot the affairs of his/her business will always experience the eventual death of any business venture he/she starts. Adequate business skills and knowledge are a necessity, as anything short of this would result in the early death of such business.

The best way to address this is to seek the services of business experts, skilled in running a business.

The entrepreneur can then learn on the job, without interfering with the running of the business under the management of these skilled experts. With this arrangement, the services of a business lawyer should be hired to protect the interests of the entrepreneur.

Unfavourable Government Policies

Government policies are key to the success or failure of any business venture. With favourable policies, local businesses can thrive and grows. This is not so with unfavourable policies, as they stifle the growth of small and medium scale businesses.

For instance, whenever small and medium scale businesses are not given adequate protection from the large and established businesses, they are totally unable to co-habit, as they easily get swallowed up by large businesses or are eventually driven out of business.


This has led to the death of several promising small and medium scale businesses. No matter the profit potential inherent in a business, it cannot survive without the availability of sufficient funds.

These are very crucial in running the day-to-day activities of most businesses. Expenses such as running costs purchase of raw materials, expenses on energy sources among several other expenses require enough capital to successfully run with little or no hitch.

As such, in order to survive in these circumstances, only the most basic expenses should be made. It will also do well to only produce goods to consumers only when needed. Having agreements with suppliers on access to credit lines will greatly solve the problem of under-capitalization which leads to the fold-up of most small and medium scale enterprises.

Business Location

There are businesses that rely on location. With the right location, the likelihood of such business thriving is high, while the reverse is true in a wrong location. Hence a business such as a restaurant, bar or other related businesses that thrive in densely populated areas will not grow or survive in scanty neighbourhoods of suburbs, as there would be little or no patronage at all. The reverse is true when they are located in places with high foot traffic.


Different scales of business in African and other parts of the world, are folding up at a very alarming rate, this has made the issue of Government sincerity in revamping the economy a pertinent one of high priority.

There are various reasons behind the collapse of these African businesses and they can be traced to the following reasons:

Lack of Capital

No business can succeed without enough money to operate daily. Once the capital runs out, the business goes bankrupt and thereby folding up

The situation is very pathetic in Nigeria, most small businesses lack needed funds. Commercial banks do not want to loan funds, and when they loan these funds their interest rate is too high, this discourages potential lenders.

Epileptic Power Supply

The power sector in Nigeria is not reliable, most businesses are now forced use petrol or diesel generator to sustain their business. This has affected the running cost of these businesses which are barely managing to survive negatively.

The present move by the Nigerian Government to privatized the power sector is aimed at encouraging private investors to fully utilize the huge potential available in the Nigerian market.


Any business can fold up due to low patronage from customers. This low patronage is often caused by the harsh economic situation which has forced business owners to cut down important needs.

Inexperienced Management

This is an important factor in the survival of every small business. The influence of management on business success cannot be undermined. Most small and medium scale business are privately owned, and this can often affect the choice of who makes relevant decisions. The decision about who manages these businesses is influenced by family ties and relationship without respect to experience and business skills. This can ultimately bring down the business in the long run.


Violence in most part of Nigeria has caused most of the small businesses to close up. Militant activities, kidnapping and ethnic and religious crisis have conspired to ensure that the average business life span in Nigeria is reduced greatly.

Fluctuating Government Policies

The constant change in Government has also resulted in change in Government policies.Some of these policies do not support the survival of business, as they put pressure on the limited resources of these small businesses. In some cases multiple taxation takes place, imported goods may also be unduly delayed due to change in government policies.

Inadequate Creativity

The creative ability of the management or the owner of the business can serve as an indispensable weapon in the time of low sales or when the business is faced with very high competition. Most business owners lack creativity, hence the high rate of failed businesses.

Creative entrepreneur study the economic situation, and are forced to diversify their operation to counter any adverse effect that would otherwise have bad implication on the operation of their business.

These are some of the reasons most small and medium scale businesses fail early. The simple remedy to these problems is to simple do the opposite. Seeking competent and qualified advice is crucial to the success of any business venture.

Also industry trends should be closely paid attention to, as they greatly contribute to how successful or unsuccessful a business will be.