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Causes of Finance Failures in Small and Medium Enterprises

Since the characteristic features of the SME’s are that they are labor-oriented and production-based, their requirements of capital inputs tend to be on the higher side. However, they have the advantage of being a catalyst for “employment generation and wealth creation.” (United Nations Conference on Trade and Development 2005).4. Government barriers and “regulation barriers” in the forms of regulations, taxation, and strict laws which may not always be practicable for the SME’s to implement and adhere to. (Northwest Entrepreneur network 2004).5. Inability to introduce new technology and update existing methods to suit customers’ needs, and to service highly demanding market requirements. “When any of these external contexts changes radically and the company is either unable or unwilling to change, it often results in failure.’ (Robinson, Carl. 2004).7. Inability to “Design, implement, and maintain adequate business strategies and systems (including policies, procedures, standards, and business structures).” (Jonker, Michiel. 2006). Controlling costs and maximizing revenues may not be feasible for certain SMEs due to inherent deficiencies in their financial systems which needs to be completely overhauled.The financial failure of these units begins when it is unable to liquidate its dues to creditors, and to stakeholders. The debts of the company are too heavy in relation to its sources of income and thus it may not be in a position to fully meet all its debts and may have to resort to external borrowings. “the debt holders or other creditors will force reorganization if a firm is unable to meet contractual obligations because working capital is slow and the firm cannot obtain more debt.” (Bankruptcy prediction, 2002).The interest on the external borrowings is high, and sometimes the SME’s may reach a stage when even this interest payment cannot be met. Interest dues on external debts are compulsory payments and have to be met, whether or not the company makes profits.

Causes of Finance Failures in Small and Medium Enterprises