CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

According to (Ayorinde 2004) in the article „Reasons businesses fail‟, enterprises have been given due recognitions especially in the developed nations for playing very important roles towards fostering accelerated economic growth, development and stability within several economies. They make-up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely contributing to the gross domestic products (GDPs) of many countries (OECD 2000).

Over the last few decades, the contributions of the business sector to the development of the largest economies in the world have beamed the searchlight on the uniqueness of the businesses; and this have succeeded in overruling previously held views that small businesses were only “miniature versions” of larger companies (Al-Shaikh 1998; Gaskill et al. 1993).

However, it appears that considering the enormous potentials of the small business sector and despite the acknowledgement of its immense contribution to sustainable economic development, its performance still falls below expectation in many developing countries (Arinaitwe 2006).

This is because the sector in these developing countries has been bedevilled by several factors militating against its performance, and leading to an increase in the rate of small business failure. These factors include the unfavourable and very harsh economic conditions resulting from unstable government policies; gross undercapitalisation, strained by the difficulty in accessing credits from banks and other financial institutions; inadequacies resulting from the highly dilapidated state of Infrastructural facilities; astronomically high operating costs; lack

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of transparency and corruption; and the lack of interest and lasting support for the SMEs sector by government authorities, to mention a few (Oboh 2002; Okpara 2000; Wale-Awe 2000).

According to (Bradstreet 1969), a careful examination of several studies on factors influencing business failure reveal that most of them were mainly independently conducted studies. They tend to simply identify the factors influencing business failures in businesses in general, and attach percentage rates to the extent at which these factors were found to influence failure (Dun and Bradstreet 1969; Altman 1971; Argenti 1976). In addition most of the studies tend to focus on SMEs in America and other developed countries (Peterson et al. 1983; Theng and Boon 1996). There appears to be inadequacy in comparative studies on the factors influencing business failure between the developed and developing nations, and even if there are a few, not much has been done between the UK and Nigeria.

This study attempts to fill this gap. In addition, despite the fact that several research studies have identified a number of generic factors influencing business failure, it would still seem inappropriate to assume that the same set of factors would lead to business failure in different regions and countries.

The significant role of small business in any economy suggests that an understanding of why small businesses fail (or are successful) is crucial to the stability and health of the economy. For this discussion we will define Small Business to be an enterprise that is independently owned and operated for profit that is not dominant in its industry.

Entrepreneurship is linked to creation of jobs, increases in productivity, and improvements of living standards, and to economic growth in the in general. Small businesses help create new jobs, introduce new products and provide specialized expertise to large corporations. Small firms represent about 99 percent of employers, employ about half of the private sector workforce and are responsible for about two-thirds to three-quarters of the net new jobs.

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Unfortunately, according to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years• "Businesses with fewer than 20 employees have only a 37% chance of surviving four years (of business) and only a 9% chance of surviving 10 years", reports Dun & Bradstreet and of these failed businesses, only 10% of them close involuntarily due to bankruptcy and the remaining 90% close because the business was not successful, did not provide the level of income desired, or was too weak to continue.

1.2 STATEMENT OF RESEARCH PROBLEM

Wherever a business goes burst, bankrupt or fails there is always a resultant negative impact of most, if not all, of the stakeholders of the business. Entrepreneurs lose their capital investments, employees lose their jobs, the society loses a means of the production and distribution of goods and services, the government loses revenues it would have earned from tax. It also reduces the standards of living of individuals and brings about the deprivation of goods and services. The impact of business failure is always overbearing and this is why the issue is attended to with great concern.

Over the years, the have been several definitions of business failure and a number of theories and thoughts on what constitutes a failed business. There are some scholars who view business failure as “discontinuance of business” for any reason, such as Fredland and Morris (1976). There are others who view failure as “bankruptcy” and the most cited work in this school of thought is Dun and Bradstreet (1969) and their definition of failure as: those businesses that cease operations following assignment or bankruptcy; ceased with loss to creditors after such actions as execution, foreclosure or attachment, voluntarily withdrew leaving unpaid obligations; were involved in court actions such as receivership, reorganization or arrangement, or voluntarily compromised with creditors (Watson and Everet 1996). Other views of failure include businesses “disposed of to prevent further losses” and

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“failing to „make a go of it.‟(Watson and Everett 1996). Irrespective of the size of any business large, medium or small, several researches and statistics appear to have ranked poor management or management inability the main cause of business failure in general (Argenti 1976; Dun and Bradstreet 1969; Wichmann 1983 amongst other). Other problems include:

1.       Lack of experience

2.       Insufficient capital

3.       Poor inventory management

4.       Over-investment in fixed assets

5.       Poor credit arrangement management

6.       Poor management decisions,

7.       Poor knowledge of the business

1.3 OBJECTIVES OF THE STUDY

The purpose of this paper is to better understand why businesses fail and how those causes can be avoided. At the end, a framework is presented to evaluate the existing resources and understand their influence on the factors of failure from a firm level. The intent is that this is one way that will promote adoption of necessary preventive measures and a plan of action to avoid such failures. Other objectives include

1.      To know if poor management decisions lead to business failure

2.      To examine internal and external factors that affects the causes of business failures.