Five Costly Mistakes That Cause Smaller Enterprises to Fail

Written by Tonia Warfield and Hubert Glover

Published in Wiley Periodicals online in Wiley Online Library (

John Wiley Publisher


Small and medium-sized enterprises account for a significant part of the gross domestic product, the total workforce, and expected growth in the next decade. Specifically, according to the Small Business Administration, there are more than 27 million privately held companies in the United States, most of them with fewer than 20 employees. SME’ employ approximately 60 million employees overall, which is close to one-third of the US population that is employed; they are projected to create more than 75 percent of the new jobs over the next ten years.

SMEs also play a key role in international trade, as they account for a surprising 29 percent of the annual export value in the United States.

SMEs have garnered a lot of attention in the current economic downturn, becoming a focus for political and corporate debates regarding access to capital and the cost of regulatory compliance. The common concern is the lack of access to capital and the cost of regulatory compliance can be devastating to SMEs.

SMEs benefit the economy by employing individuals, by discovering new practices that can lead to new jobs and new industries by creating business efficiencies.


The strength of an SME is that it does not have the organizational limitations that in larger companies often stifle innovation. SMEs can often respond to market changes quickly. On the other hand, SMEs are crippled by a lack of objective opinions about ideas and a lack of expertise in key areas such as finance, inventory management, and operational management.  Another way of putting this is the owner has to wear many different hats. Is this a requirement for SMEs? Many executives of SMEs will state they have to do everything or else nothing will get done. That’s true if they are the only ones with the authority to make decisions.

We all know someone who runs a business-and usually that person is always running around. He has to make every decision for the business. There are employees, but they have to wait on the OEO before anything can be finalized. Even if it’s a transaction that is done the same way every month, the OEO has to review it and approve it. They are the owner- literally. They take ownership of everything and they can’t delegate. Why is this so dangerous?

What if the OEO is hit by a bus? Will the business continue to run? The answer is usually only for a short while. If the OEO is incapacitated for a significant period of time, many businesses will fail.

What can an SME do to avoid this situation? Create processes and procedures. The procedures should indicate the correct way to handle transactions and include thresholds for management approval.

Once policies and procedures have been put in place, an SMEs management will have more free time to plan. A lace of planning can cause the business to fall behind its competitors and lose customers.


Emotion rules decisions. If the mood of the management determines the actions taken to satisfy customer request, deal with employees, and interact with suppliers, the business is in trouble. People want consistency in a business. Therefore, emotional leadership not only has a negative impact on the internal environment of SME, but is also has a negative impact on the bottom line.

When decisions are made based upon the emotions of decision makers, customers will leave. Suppliers will no longer want to deal with the SME. What can be done to avoid emotional leadership? Allow information to guide the decision making process. One of the key missing elements of some SMEs is “management by information.” Some SMEs are very reactive, which can certainly have its benefits, but there are also several disadvantages.

Managing by emotions and not information violates the key reason financial information is generated especially management accounting information.

Many SMEs do not have a formal process for summarizing the financial and operations results. This impairs their ability to effectively submit bids. The lack of information also prevents these businesses from effectively managing their cost if they win a bid. As a result, quality, reliability, and (in some cases) the very existence of the business become major issues. This results in poor customer service and satisfaction, which limits the future opportunities due to a bad reference.

All businesses rely on their reputations to sell future goods and services. A bad reputation for quality and reliability will have an adverse impact on future revenue generation. The impact is even more significant for SMEs. The long-term success of SMEs is especially dependent upon their operating and managing the business based on information instead of emotion.


Amazingly, many SMEs cannot concisely convey what their enterprise does and what makes it unique or competitive. If the SME doesn’t know it’s competitive advantage, it can’t expect customers to know it.

Several SMEs neither know their industry or their target customers as well as they should. Just as job candidates should study the industry and potential employer before an interview, SMes should study the industry and potential customers before approaching customers. Several SMEs approach potential customers without doing their homework. As a result, they fail to expand their business, retain business, and deliver quality services.


Many SMEs want to play like the big boys and play in the political arena. They will attend $1,000.00-per-plate fundraiser, contribute to political action committees, or give directly to campaigns of individual candidates. This is , frankly, a poor use of funds. An SME cannot make a dent in the types of influence that companies like Microsoft, General Electric, or even foreign companies can have on the political process.

A more efficient and cost-effective way to obtain influence and seek advocacy is to join industry groups such as the US Chamber of Commerce and professional organizations such as the American Institute of Certified Public Accountants. The organizations generally have separate PACs or committees that focus on regulatory monitoring and respond to emerging legislative matters as they arise.

Instead of being a small fish in a big pond, SMEs should join a large group with a voice. For a nominal fee, an SME can join these organizations and get involved on a committee.


There is value in having a financial team-whether internally, externally, or both. A financial team can help ensure accurate, timely, and relevant generation of information to assess and evaluate the business.

This is the area where many SMEs are often not well developed, whether because of a lack of resources or a lack of appreciation for the value of effective financial management. Good financial management is necessary not only for internal monthly reporting, but also to assess an company’s operations and performance. An accurate assessment of company performance requires accurate financial data.

One of the best ways to ensure accurate financial data is to have a good financial system and a competent financial professional. It is best to obtain an financial system that can handle transactions particular to your industry. Regardless of the financial system, the financial information on only as good as the data entered.

A financial expert for an SME is often a necessity rather than a luxury. SMEs cannot afford to misstate their financial performance. When growing a business, the ability to evaluate whether or not prospective business is profitable is essential to success.

Potential customers develop an expected price range and, while they seek the lowest bid, they often go for what is called the best value or best realizable value. Companies often know that if a set of prices seems too low, there could be an issue with the quality, reliability, and even continuity of the vendor offering the goods or services. Some bid evaluation committees view extremely low prices as a lack of understanding of the project or bid requirements. As a result, some of them will evaluate the vendor poorly on technical qualifications even when the original red flag was a pricing issue.

The lack of appropriate financial management systems will impair an SMEs ability to obtain working capital to sustain or expand current operations. Stakeholders such as banks, suppliers, and leasing companies evaluate the management of an operation through Dun and Bradstreet reports and reviewed or audited financial statements. They may also conduct an office visit and ask about your ability to manage your company. They want to know that their risk will be minimized by an SMEs effective use of financial management tools such as budgets and monthly performance reports. If an SME does not have reliable financial dta, ti will impair the SMEs access to capital.


Financial professionals can assist and SMEs owners and management to translate their vision, mission, and strategic goals into measurable annual and multiyear budgets. They can also establish key performance metrics and supporting systems to provide timely information and help SMEs with pricing and cost analysis for bids or orders, and also assist them with regulatory compliance.

Financial professionals can assist SMEs in resolving these challenges and frequent causes of business failure. Financial professionals can serve as business advisors by navigating management through business information and assisting them with the development and maintenance of key business systems such as a financial and operations plan, a budget, and a financial system.

The growth due to the economy and technology in “freelance consultants” across various disciplines allows access to “buy as you need” professional support from accounting to marketing.

When the management of SMEs fails to deploy an appropriate level of expertise within their budgetary constraints, the result can be a “do-it-yourself” management style that may be fine for low-volume and small projects, but it is not sustainable for large-scale or high-volume projects. It takes a team of experts to be successful on a long-term basis for large-scale and high –volume projects.

It is critical that businesses develop appropriate business systems for their level of activity to generate reliable, timely, and consistent financial and operational information. The ability to use cloud-like services in accounting, technology, and legal services is available today in a cost-effective manner. Financial reporting must be performed on a consistent basis. Ideally, it should be a financial professional who understands business information particular to the SMEs industry.

SMEs are an important component of our GDP and of everyone’s plan to rebuild our economy. The five most costly failures can be resolved largely by obtaining appropriate support from financial professionals. Financial professionals can assist SME executives and management to translate their vision, mission and strategic goals into measurable annual and multiyear budgets. They can help SMEs establish key performance metrics and supporting systems to provide timely information; assist with pricing and cost analysis for bids or orders’ and assist them to ensure that regulatory requirements are met.

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