Why do SMEs fail? We explain!

Figure out why SMEs fail It is essential in times where entrepreneurship is encouraged. This does not imply demotivating people who intend to develop their own project. On the contrary, knowing what are the circumstances that affect a small and medium-sized company (SME), will allow avoiding these errors or addressing them in a timely manner so as not to repeat the pattern.

What is the importance of SMEs in Mexico?

If you have taken a tour of the streets of your city, you have surely noticed the number of businesses there are. From the corner stationery store to the neighborhood store, all of them make up economic units that have a large-scale impact. According to the 2014 Economic Census, in Mexico the 99.8% of companies are micro, small or medium-sized companies.

Despite the fact that the size of these businesses is small, since each one employs no more than 251 people, nationwide 7 out of 10 jobs are located in SMEs. Therefore, the importance they have for population occupation and, consequently, for the country’s economy is evident.

Unfortunately, some aspects in the operation of SMEs make them vulnerable organizations and at high risk of closure.

Why do SMEs fail?

the mystery of why SMEs fail has led to speculation about the circumstances that affect a company. However, we believe that stating a single reason removes and simplifies the overall context. In other words, there are several reasons that intersect when closing a business, so it will be necessary to address not only the main cause but also all of them.

According to The Failure Institute, early-stage and growing companies were the most susceptible to failure. These accumulated 33% and 27% respectively of the closures in the country during 2017. This shows us that, in addition to the vulnerability they have due to their size, there is also the factor of their youth and lack of experience that play a role. important in the cessation of operations.

According to a study on the closure of companies in Mexico, among the 5 main reasons why SMEs fail are:

Not having enough income

It refers to the lack of capital to maintain the operations of the company. This can be due to several reasons, for example, difficulty in obtaining external financing or misuse of the money to start that did not leave enough profits.

Lack of indicators

Mismanagement can accelerate the failure of SMEs. Therefore, having diagnostic parameters that help determine the state in which the business is located, are essential to make timely decisions.

Not having analysis processes

Similar to the previous point, the lack of references that serve as indicators of success prevents the operations from being aimed at achieving them. Obtaining profits, although it is essential, is not the only goal pursued, but by not considering the others, other aspects of the company are neglected.

Not having efficient planning

In the absence of the projection of the operation of the business, which includes aspects such as deadlines, amounts, times and processes; the global vision of which are the areas involved and how they operate is lost. Therefore, a plan in which everyone participates cannot be executed.

Execution problems

Planning does not guarantee a good result. Although the projections look adequate on paper, other problems that were not contemplated may arise when acting. Therefore, flexibility and willingness to make changes and adapt the original plan to new circumstances is needed.

What factors may be influencing the failure of SMEs?

Bad financial management, excess debt, poor business approach or operational excesses affect the operation of small and medium-sized companies. According to a UNAM analysis, the first symptoms of the beginning of the failure of an SME are the gradual loss of the market, decrease in profitability, loss of key personnel, lack of liquidity, to mention the most important.

SMEs are essential for the functioning of the economy. According to lNEGI, More than 5 million companies of this type operate in the country and are responsible for generating more than 70% of employment in the country.

Given its importance, it is essential that the owners of SMEs detect their weak points at the right time and can correct the path to guarantee their permanence in the market.

How does a crisis affect SMEs?

The economic weakness hits small and medium-sized companies directly. The lack of income, the drop in family consumption, unemployment, can definitively close a business of this type. Thus, the Covid-19 pandemic completely transformed its operation, without this representing that there are still some alternatives to stay in the market.

In the case of SMEs that have some credit and face complications to continue paying their monthly payments due to the effects of the health contingency, the financial authorities and banks in Mexico designed some programs to defer payments of their debts from four to six months, with the objective of providing them with liquidity and maintaining salaries, payment of services, among other commitments.

What are the extensions for SMEs by ?

Generally speaking, the National Banking and Securities Commission (CNBV) established rules so that SMEs had a grace period for the payment of principal and interest on their loans contracted with banks in Mexico. It is very important to emphasize that this is not a debt cancellation, but once that period is over, SMEs must resume their commitments.

At par, These measures by the Mexican financial authority did not affect the record in the Credit bureau of the owners of SMEs, with which the door is open to the banks to obtain some new financing or improve their credit conditions and face the recovery after the coup by the Covid-19 pandemic.

According to data from the Association of Banks of Mexico (ABM) 3 million 3 thousand micro, small and medium-sized companies took the extension of the banks for the payment of credits and the design of new support measures by the country’s financial sector for Mexican SMEs is expected.

What is the percentage of SMEs that fail in Mexico?

According to INEGI, the life expectancy of these productive units is 7.8 years. However, 80% fail before five years and 90% do not reach 10 years.

In an adverse scenario, it is very important that entrepreneurs detect their weaknesses and approach specialists to apply solutions. In most cases, in-depth analysis must be applied to locate resource leaks, failures in the business structure, or market needs that have not been met, and design proposals for their solution.In the case of over-indebtedness problems or complications in meeting financial commitments, a credit repair It can be a viable alternative to correct the path and not allocate money to pay debts and invest it in the development of the company.

Can SMEs be prevented from failing?

Although there is no magic and infallible formula so that SMEs do not fail, certain areas of the administration can be strengthened that help to give direction and warn of areas of opportunity. Accounting and tax responsibilities are essential to boost business, especially if we take into account that according to ENAPROCE data, half of SMEs lack a formal system to keep track of their resources.

Investing in a good accounting system will allow areas of opportunity to be identified and better use of available resources is made, in addition to establishing indicators, planning and executing strategically. In the event that money becomes scarce, consulting the accounts will be very useful to verify if it is worth continuing or it is better to cease operations.

Currently there is a great diversity of accounting options and the market has opened up even more possibilities. Digital platforms such as Enconta manage to offer a great accounting and tax service, combining the latest technology with the best talent. Therefore, for companies of any size but mainly for small ones, this option could serve as an ally in the growth and strengthening of their business.

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