It has been observed that minor issues trigger series of events that ultimately result into closure of an enterprise. It may be a small headache and leave on critical day, a tough decision to sack a negligent employee, one week delay in payment of salary or one day delay in supply of order. Owner of closed enterprises are so much stressed that they are not able to identify reasons themselves.
A list of major reasons is listed below for ready reference so that appropriate strategy for revival can be prepared.
Knowledge & Skills
It has become a general practice that those who do not get a job start business (or a shop). Often less educated people start business and educated people find regular salaried job in government or private sector.
Generally entrepreneurs undergo trade related skill development programme and immediately start business without adequate planning and risk management.
Till the business is small they don‘t find problems but when they start expanding they are not able manage the business due to lack of knowledge.
It has been seen that people who read management techniques, attend training & informational programmes and those who hire professional advisers are able to solve their day to day problems and significantly reduce risk associated with business.
Generally management systems evolve over a period of time. These are not planned and well implemented. Due to this there are delays in decision making and wrong decisions are taken in haste. Firm get ISO certified but they don‘t maintain system as per standard requirements.
There are frequent management conflicts because policies are not documented and shared with everyone in the organisation. Total cost of ownership of computer software solutions to manage financial, production, marketing, human resource and administrative processes is too high beyond capacity of small entrepreneurs.
Often small enterprises are one man show who is not able to manage all diverse management processes. Hence the system breaks down.
Entrepreneurs often quote shortage of following resources.
- Finance: Delay in disbursement of loan, unplanned expenses, delay in receipts from customers, blocking of capital in excess inventory, etc.
- Material: Non-availability of good quality raw material, delay in delivery of material, damage due to fire or improper work environment, etc.
- Manpower: Labour shortages, lack of skills, sudden resignation of key person, poor productivity, strikes & conflicts, high idle time, etc.
- Technology: Termination of technical-knowhow contract, sudden stoppage of supply of critical spares, breakdown of critical component, poor maintenance, etc.
Supply Chain Problems
Closure or business problems of major entities in entire supply chain may also create problems for enterprises which are not prepared with contingency plans.
- Primary Producers (farmers, miners, etc)
- Immediate Suppliers
- Distribution Partners
This is the most quoted reason by small entrepreneurs because they are not able to advertise their products on large scale. Most of them are also contract dependent which get reduces due to increased competition.
- Product Portfolio: Selection of wrong products which may result into overall loss to enterprise, over-dependence on a single product, unplanned and unprepared launching of product, etc.
- Advertising: Improper use of advertising tools, lack of funds, etc.
- Distribution: Lack of distribution options, high transport & warehousing cost, high profit sharing with distribution partner, etc.
- Cash Collection: Delay in payment from customers and channel partners, extending too much credit, etc.
- Lack of Demand: Failure to create demand, dependence on contracts or few parties, change in government policy, competition, etc.
After opening of economies globally established large players of developed countries have entered developing markets in big way, thus creating competition for small and medium enterprises. They large enterprise have following competitive advantages:
- Better products
- Better access to critical resources (land, labour, capital and technical know how)
- Better management system
- Better advertising and marketing
They enjoy preference on all resources due to their size and established track record. Even if they make huge losses, they get easy finance in same country or through some other country in which they are making profits.
Often these companies abuse their dominant powers to reduce competition.
Lack of or non-maintenance of promised public infrastructure is also a major concerns due to which enterprises are not able to survive. These include:
- Roads and transportation
- Electricity and water
- Post, telephone and internet
- Waste treatment plants
- Advanced healthcare facilities
- Education for children of workers
Public infrastructure requires heavy expenditure which is beyond capacity of small entrepreneurs. Even for large enterprises are not able survive due to lack of some of these facilities:
Multiple Legal Cases
In India, there are more than 70 business laws (containing more than 1000 legal compliances) are applicable to an enterprise. The number is so large that even the most qualified legal expert in country cannot even list names of laws that are applicable to an enterprise.However business owners (often not legal experts) are primarily held liable and responsible for all legal compliances even in cases when they have hired qualified professional like company secretaries and chartered.accountants.
There are many provision in which a police officer can arrest owners of enterprise even before starting of investigation process. One day of arrest often means permanent closure of enterprise.Often established competitors sponsor (pay bribe) employees and corrupt people to initiate legal prosecution on false grounds in order to reduce competition. Such tactics are also used by negligent and non-performing employees to make owners pay them undue money and benefits.
Due to threat of harassment by authorities most of the enterprises stay unregistered, which operate from home or unauthorised places. Opening or closure these enterprises is not even recorded.
Changes in Government Policy
Government policies create opportunities for some and shut down opportunities for other. Some of examples of government policies are given below that result in closure of enterprises:
- Curtailment of benefits earlier enjoyed
- Extension of benefits to other in specified areas
- International treaties and agreements
- De-reservation of products earlier reserved for class of people
- Compulsory acquisition of property or business by government
- Relocation of industries under government order
- Damages during violent protests and strikes against government policies