Reasons for failure of SMEs in the Free State

Abstract

Small and medium enterprises (SMEs) are important tools to address the challenges of job creation, sustainable economic growth, equitable distribution of income and the overall simulation of economic development. The failure rate of SMEs in South Africa is very high and it is of great importance to investigate the reasons for failure of SMEs which impacts on their performance. The high failure rate of SMEs paints a bleak picture of the SME sector’s potential to contribute meaningfully to job creation, economic growth and poverty reduction. This study investigates the reasons for failure of SMEs in the Free State, for the reason that there are many risks involved in managing them due to the challenges experienced by the owners across all the different business industries. The study focused on reasons involved in common business failures which are managerial, financial and the economic environmental reasons. The objectives of this research were achieved by means of questionnaires that were distributed to 50 SMEs in the Free State Province. Fifty (50) questionnaires were received back from the respondents, which means that the return rate of the questionnaires received was 100%. The quantitative data analysis method was used and the gathered data included three major aspects of the study which are the financial, managerial and the economic environment. Managerial and financial reasons were found to be among the leading causes of SMEs failures, where the respondents indicated that there is a lack of business, financial management and the marketing skills. Lack of business and management skills was also amongst the major causes of SMEs failure because the respondents indicated that without these skills, their businesses are bound to fail. In addition, using the company’s resources for you own personal benefit or financial mismanagement has also contributed to failure because these companies have not been previously audited and it was therefore easier for them to recklessly use the funds. It has also been established that the educational qualifications as well as managerial skills also plays a critical role in the failure or success of the SMEs. The study also made some recommendations from the research findings and it is clear that the government and the other role players needs to address the challenges and problems faced by the SMEs.