April , 2019
Start Ups – causes for failure and solutions
16:12 pm

Raja Sreenivasan

According to a recent policy note on MSMEs prepared by the MSME Department of the Government of Tamil Nadu, close to 50,000 Micro, Small and Medium Enterprises have terminated their operations in the state. This may not be peculiar to this state but a pan-India trend, which causes concern. The MSME sector, according to a survey conducted in 2018, comprises about 63 million units and employs about 111 million people in India.

When a new entrepreneur starts his business, he has great ambition. After some time, when he finds it impossible to carry on the business, he is totally distressed and disappointed, confronted with heavy debt burden and blames his bankers for not providing required working capital loan to tide over the crises and continue in business. This is the story of many unsuccessful businesses. On closer scrutiny, the following reasons can be identified as reasons of failure:

l Ineffectiveness of marketing effort l Wrong direction of marketing effort l Poor and faulty marketing strategy l Wrong selection of product and market l Product failure due to wrong pricing or quality or packing l Wrong methods of distribution l Excessive credit sales l Inability to collect outstanding in time l Lack of managerial experience l Financial indiscipline and mismanagement l Lack of direct contact with dealers and customers.

When the business shows signs of decline, the management should immediately analyse, find out the reasons and put in place remedial action. But often they fail to anticipate the impending disaster.

Entrepreneurs are of two types. One – employed in large industries in designated positions – say production or sales, and as they are successful, they start assuming that the success is because of their own contribution to the company; they fail to recognize the fact that, their contribution is only a part of the total contribution by all other managers and staff; moreover the products sells by itself because of its brand image built over the years by the company. Because of their over self over-assessment, they feel that they can start their own unit and they will be successful.  When they start their own unit, they have to attend all the work pertaining to different functional areas such as production, finance, human resources, marketing and sales. When he tries to manage all functional areas by himself, he fails in areas where he had no experience. The other type of entrepreneurs are first generation entrepreneurs who have the same lack of experience and listens to everyone’s advice; spends the bank loan in other sectors than for what loan was obtained and finally ends up in debts.

These people have not done proper market survey to assess the demand for their products and in zeal to build up the market; they invariably sell more on credit and suffers heavy unrealisable bills receivables.  Even for those experienced entrepreneurs, increase in sales turn over, increase of customer participation year on year; give a deceptive picture of growth and suddenly one day they have to close down their show. The following table will prove this point.

It is deceptive. Year on year, turnover is increasing and the customer base is also widening and at first look, the picture is rosy. But if you analyse the data, it will be revealed that old customers discontinue participation due to some grievance. Management is not bothered to know whether we have the backing of old customers also, because they are satisfied with the increase in turnover and the number of customers. Where they should be having 590 customers in their sixth year of existence, the actual customers are only 130. In course of a few more years customer base will come to nil, unless some corrective action is taken in time.

Grievances may be due to:

l               Staff indifference l Product quality deterioration l Price not being competitive l Standard packing in quantity does not meet their requirement l Delay In service l Product mix and product line are not matching.

If the management takes care to implement sales audit, right from the beginning, they would notice this trend of customer leaving and take corrective action. As we have finance and cost audits, we should also have sales audit in place. Moreover, managements are careful to fix and monitor production and sales targets but they seldom monitor how much sales orders are subsequently cancelled by the customers. The primary data on which managements take decisions, is itself not dependable. So sales audit is a must and it is the solution.


Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <blockquote> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.