7 Reasons Why Small Businesses Fail Within The First Year

We hear many statistics about small businesses often, especially about their failure rate within the first three years. Those statistics have become very personal to me due to the fact that my small business struggled a lot last year and almost closed. I have also encountered at least three young entrepreneurs that I know, who have closed their businesses over the last year – and their businesses were less than a year old. Today I want to focus on seven main reasons why small businesses fail within the first year. I believe that knowing the reason why, will help small business owners avoid most of these pitfalls and keep their small businesses going, and it time, successful.Business closed sign

1.Underestimating capital requirements

A lot of small business start-ups don’t think that having a business plan is necessary, however; it’s imperative to write one, especially when starting your small business. A business plan not only helps you put down your business idea on paper and how it will be executed; it also helps you know the capital requirements required to start and run your business for at least six months. Some start-up owners get so excited about starting their small business that they don’t sit down to write the actual required cost of starting their business. They tend to find out when it’s too late and the business is failing already. Make sure you have a business plan for your small business if you don’t already have one or if you want to start your business.

Budget for your start-up accurately

Budget for your start-up accurately

2. Poor business store location

This is one reason I can testify to personally; especially when it comes to researching whether a specific location will match the products or services that you offer. It can be a great high traffic area, but your business may not do well because you do not offer what the customers in that area want or require. It’s necessary to always do product and market research in the area you want to start your business to see if your business has a fighting chance. If it does not, don’t start your business in that location; no matter how good the shop or area looks. Just be patient and keep looking for a better location for your business.

3. Poor Management of Business

This is a major cause of small business closure in Kenya; a small business owner may be very motivated and have qualities of an entrepreneur; however, you also need to have management skills to run your business as well. The day to day operations of a small business require knowledge on how to manage different aspects of your business e.g. cash flow management, how to hire employees, how to choose vendors, etc. It’s necessary for small business owners to either acquire basic management skills or to either partner or hire a  person who has the management skills required. This might not seem necessary to a start-up owner at the beginning; but trust me, it’s very necessary for your business to stay open in the long run. A great website for resources on running your small business is Kuza Biashara, they have blog posts and ‘How-To’ videos that assist small business owners in Kenya.

4. Lack of Creativity and Innovation

Whatever product or service your business offers, make sure you’re always innovating it. Every successful company has gotten there because they are constantly being creative and innovating in their business. A great example of innovation and creativity is a Kenyan company that manufactures energy saving jikos – Cookswell. They originally just sold jikos and charcoal ovens; but in time, they added barbeques to their product list. They then started creating barbeques in animal shapes such as boars or ostriches. This kind of creativity and innovation keeps your customers coming back and loyal to your brand since they’re curious as to what you will do next.

The Cookswell Animal BBQs - Great creativity & innovation!

The Cookswell Animal BBQs – Great creativity & innovation!

5. Poor Control of Expenditure

This is another major reason for small business closure, especially in Kenya. A small business could be bringing in revenue but if the owner does not have control over the expenditure of the business cash; the business could close in time. A major problem for the small businesses is also the mixing up of personal and business finances. It’s good to ensure that as a small business owner you separate your personal finances from your business finances. It’s also necessary for a small business owner to ensure that they are tracking all their business expenditures by keeping all the necessary accounting records necessary.

6. Theft, Fraud, Fire and Natural Disasters

Unfortunately for a small business other factors that may be beyond your control can lead to the closure of your business. The best way to avoid such factors or at least to survive them is by getting small business insurance. Insurance can cover you when either theft, fraud, fire and natural disaster strikes. Make sure you understand your small business insurance policy very well, get the insurance agent to explain to you what it really covers and what it doesn’t to avoid any misunderstanding. Small business owners tend to think that they don’t need insurance since they have small business; however, since there are things you cannot have control over; it’s better to be prepared instead.

Theft can occur in your small busines (Image: uca.org)

Theft can occur in your small business (Image: uca.org)

7. Poor or no marketing plan

This may seem obvious but I have noticed some small business owners seem to ignore this aspect of their business. Marketing is an activity that never stops as long as your business is open – I mean, look at Coca Cola, they have never stopped marketing and they are such a large international company. Marketing is what brings in sales into your small business; therefore, you should always ensure you have a marketing plan in place. Other small businesses also have a marketing plan, but it’s either very weak or not effective. In this day and age of social media and online search; you need to make sure that your business’ presence is felt. It is a very competitive business market out there in any industry and your competitor is probably still marketing to your target market whether you are or not.

Baking Class Poster - Never stop marketing your biz

Baking Class Poster – Never stop marketing your biz

I hope this seven points have helped you, as a small business owner, realize where your problem points could be and avoid business closure or failure in the future. If you have any other points you would like to share that can also cause business failure; please feel free to comment below.

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4 Important Legal Requirements for starting a Small Business in Kenya.

If you want to start a small business in Kenya legally and you’re not sure how to get about acquiring the required permits, here are some tips on how to get started.
The first thing I did before I started a small bakery was to go online to the Nairobi Business Licensing website and find out the kind of permits required to run a bakery legally. Another thing I did was to go to our local City Council offices and talk to the officers to explain the necessary documents and how to go about getting them. So I would advice to make sure you speak to the City Council officers in the area you will be conducting business.
Another website you should visit to research is the KRA website. It will give you details on how V.A.T. taxes are charged and should be paid. You should also get advice from a lawyer about tax requirements if you are registering a company.
Today I will just state a few legal requirements to get started but make sure you do your research on your particular industry.

1.) Business Name or Company Registration.
There are two ways you can register your business; you can start by registering your business name, this is ideal if you have a small budget and cannot be able to register a company yet. It’s a simple process, go online to the E-Citizen portal, sign up and create a user I.D. and from there you should be able to go to the E-Business portal and do a name search ( you check different name options for your business, one at a time) it’s Kshs. 150 per name, this takes at least one day. After the check;  the name is held for you for 30 days; this gives you a chance to register the name of your choice and it usually takes at least 5 days and costs Kshs. 850. You can register individually, as a sole-proprietor or if you are 2 or more people, as a partnership. After you’re done, you get a certificate of registration for your business, this is emailed to you and you can print it. This means that  nobody will be legally able to use your business name.

Another way would be to register a Company, if you have a higher budget of about Kshs. 25,000 to 45,000. This process is done by a certified lawyer. Choose a good reliable lawyer to handle the matter for you and it should be done in about 2 weeks. After the lawyer is done, you should have a certificate of incorporation, and for an extra fee (about Kshs.2500) you get a company seal. The lawyer can also assist you in getting a Tax PIN certificate for your business.


You will require a Fire Extinguisher for your business

2.) City Council Business Permit.
For you to conduct business, you also need an annual business permit from the City Council. The details on the cost depend on the size of your premises and the industry you have chosen to do business in. For example, a regular sized bakery City Council permit costs Kshs. 8000 per year. Talk to your local City Council officers on the cost and they may visit your premise to confirm the size of the location and they will advice on how to pay. You will get a receipt when you pay, and then the certificate itself after about a week. You can also visit their website for more information at http://www.nairobi.go.ke. This process has also been made more convenient; you can still choose to use the E-Business portal to get a permit. Be aware that you now have to get a Unified Business permit; this includes annual business permit, signage payment/certifcation and Fire License. If your business industry requires it; you will also have the Health License included as well. Click here to find out how to get the Unified Business Permit
3.) Food/ Health Related Permits.
If you are in an industry that requires health certification such as food, bakery, beverage, salon etc. You will require a Health Inspector to visit your place of business and after they have inspected your location, you will be certified. When you pay you receive a receipt and about a week later you get a certificate. Please note that starting 2017 – this is included in your Unified Business permit.
4.) Fire Safety Certificate
Currently, all businesses are required to be Fire safety certified. This requires you to have at least a fire extinguisher and any other fire safety requirements a Fire safety inspector will advice you on, based on your business. After the inspection, you will be certified and get a Fire Safety Certificate. This certificate is also now to be included in your Unified Business Permit.

I hope that this will help you at least get started with your business, make sure you do research in your industry to get the right information to get you legally started.

If you have any questions, suggestions or any comments to add, please feel free. Thanks ^_^