What causes to fail SMEs in Sri Lanka?

Recently, I carried out a study on causes affecting business failure in SMEs in Sri Lanka. Some salient findings of the study that have been published in an article appeared in Daily mirror on 2016-01-05 (https://shar.es/16AimB) is given below for my blog fans.

Here you can read with it

It is a global understanding and a duly recognized fact that Small and Medium Enterprises (SMEs) are a major contributing source to emerging economies in terms of economic growth, employment generation, social cohesion and development. In Sri Lanka, SMEs contribute more than 70% to Gross Domestic Product (GDP) and employment generation. Indeed, SMEs contribution to Sri Lanka’s economy is significantly more than in Singapore, Malaysia and Japan. It is therefore important to understand the performance of SMEs given that the failure of this sector would have a significantly adverse impact on the Sri Lankan economy.

Findings

The findings of the study indicate the following. The rate of business failure among SMEs is 45%. Further, the findings of the study showed that seven variables are significant in explaining business failure in Sri Lanka. These variables are: business planning, record keeping, issuing postdated cheques, budgetary controls, staff quality, basis of recruitment, and commitment of owners for business management.
It shows that these variables (causes) fall into few broader areas in business management such as lack of prior business planning, lack of up to date reliable accounting data, inappropriate financial, and human capital management, and inadequate commitment of owners for business management.

The magnitudes of the effects of these variables were calculated with odds ratios. Commitment of owners takes the highest odds ratio, which is 14 times. It means that possibility of a business failing due to lack of owners’ commitment is 14 times compared to a business that has adequate owner commitment.

Among others, analysis also showed that the level of education of business owners, prior business and managerial experience, marketing knowledge and skills, and startup capital are also important in influencing business failure. In addition, it has revealed that there is a significant difference between SMEs that have failed and those that have succeeded in relation to these significant variables. It showed that the percentage of business success is substantially high given that those variables were substantially addressed in the business. The results of this study were further compared with other similar studies to gauge the relevance of the variables identified for Sri Lanka. The results showed that these variables also largely accounts for the business failure in other countries. However, the variable ‘commitment of owners’ was not tested in other studies in other countries; it is a significant factor influencing business failure in Sri Lanka. Therefore, it could be considered as a country-specific variable to Sri Lanka.

Conclusion

In conclusion, business failure in SMEs in Sri Lanka is 45%. And also seven factors are found to be significant in explaining business failure in Sri Lanka. In other words, in order to establish a successful business, there should be prior business planning, and having up to date reliable accounting data, effective financial, and human capital management practices, and adequate commitment of owners for business management. However, a business could be failed due to one particular factor or due to impact from several factors. Hence this study recognizes only common reasons for business failure in Sri Lanka, but there may be various other reasons of business failure, which will be specific to those failed businesses. For an example, findings of the past studies contended that some businesses have failed due to business expansion, disputes among business partners, inventory management issues, economic recessions etc…Nevertheless, fundamental business management principles such as proper business planning, effectiveness in financial management, live recording of accounting data, effectiveness in human capital management, and your own commitment for business management are basics of good foundation for business success. In addition, as per the past studies in the world, lack of prior business and management experience, inadequate startup capital, lack of marketing skills and knowledge were also contributing source to business failure.

Recommendations

As an overall recommendation, the government of Sri Lanka should consider the importance of understanding SMEs failure and provide business support systems in terms of business planning and monitoring as a matter of priority. In this context, this study suggests the government should consider centralizing various fragmented agencies and institutions, which were established for SMEs to one organization in order to encourage business start ups, provide advisory services to small businesses and finally to minimize number of business failures in Sri Lanka.