why small businesses fail

Why Small Businesses Underperform

why small businesses failA recent report from a research study conducted by CIMA yielded some interesting findings.

Its conclusions were:

  • That the underperformance of small companies was due to the failure to use appropriate management accounting tools (such as cash management, pricing models, cost reduction and profit analysis)
  • That many small companies make decisions without any financial information or analysis
  • The most likely not to use any tools were those that were smaller, profitable and where their managers did not have any financial background. When their businesses grew in size and complexity they underperformed and in some cases failed thorough lack of decision support and adoption of tools that they didn’t feel appropriate when they were small and didn’t adopt as they grew

The reasons given was that many business owners make their decisions based on gut feel and this is a great survival technique and a viable strategy while the business is small. But gut feel is based on experience and historic data and by its nature backward looking, like driving your car by looking out the back window. As the business grows and the landscape changes new challenges present themselves, which are more complex and require more rigorous analysis than an immediate response.

As businesses grow to medium size they naturally use management accounting tools to manage their business as the adoption of financial analysis feeds into decisions on pricing, cost reduction, cash management and the assessment of risks. So there is a case that small companies that adopt financial analysis early would not only improve the probability of survival but also grow more quickly through the efficient use of resources and more effective decision making.

Webworks have been working with small business owners to overcome issues recognised in this report and in response have developed finance packages. These packages aim to offer small businesses the necessary insight and analysis they need to make their business grow at a cost that is a fraction of that from high street accountants. Moreover when these services are taken in combination with website services and SEO that aid exposure of your business to interested buyers then the results can be potent.