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Pymes_fail-1024x562.png Why do SMEs fail? Analysis Banking and Investment Community Economic Financial Informations and Reviews Market News Society

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

What is the importance of SMEs in Mexico?

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

Although 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, it is evident the importance they have for the population occupation and, consequently, for the economy of the country.

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

Why do SMEs fail?

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

According to The Failure Institute, early-stage and growth-stage companies were the most susceptible to failure. These accumulated 33% and 27% respectively of the closures in the country during 2017. The above 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 an important role 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 money to start that did not leave them enough profits.

Lack of indicators

Mismanagement can accelerate SME failure. 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, lacking references that serve as indicators of success, it prevents operations from being aimed at achieving them. Making profits, although essential, is not the only goal pursued, but by not having the others contemplated, 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 what are the areas involved and how they operate is lost. Therefore, you cannot execute a plan in which everyone participates.

Problems in execution

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

What factors may be influencing the failure of SMEs?

Financial mismanagement, excessive debt, poor business approach or operational excesses, affect the operation of small and medium-sized enterprises. According to an analysis by UNAM, 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 the 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 way to guarantee their permanence in the market.

How does a crisis affect SMEs?

Economic weakness directly hits small and medium-sized enterprises. The lack of income, the fall in household 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 postpone the payments of their debts from four to six months, with the aim of providing liquidity and maintaining salaries. payment of services, among other commitments.

What are the extensions for SMEs due to Covid-19?

In general terms, the National Banking and Securities Commission (CNBV) established rules for SMEs to have 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 it is not a debt forgiveness, but that once that period is over, SMEs must resume their commitments.

At the same time, these measures of the Mexican financial authority did not affect the history in the Credit Bureau of the owners of SMEs, so they have the door open to banks to obtain some new financing or improve their credit conditions and face the recovery after the blow by the Covid-19 pandemic.

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

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 the age of five and 90% do not reach the age of 10.

In an adverse scenario, it is very important that entrepreneurs detect their weaknesses and approach specialists to apply solutions. In most cases, deep analysis must be applied to locate resource leaks, failures in the business structure or market needs that have not been addressed and design proposals for their solution. In the case of problems of over-indebtedness or complications to meet financial commitments, credit repair company can be a viable alternative to correct the path and not allocate money to the payment of 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 that help to give north and warn areas of opportunity can be strengthened. Accounting and tax responsibilities are essential for the promotion of the business, especially if we take into account that according to data from ENAPROCE, 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 to be made, in addition to establishing indicators, planning and executing strategically. In case the money begins to run out, consulting the accounts will be very useful to corroborate if it is worth continuing or it is better to cease operations.

Currently there is a great diversity of accounting options and in the market it has opened up the possibilities even more. 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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