It is not a secret majority of new businesses in Kenya fail within the first year of operations. Statistics show that the chances of a new business succeeding are less than those of failure. Hence, lets evaluate the causes of business failure in Kenya.
This high level of failure is caused by many reasons that span from unfriendly government policies to a competitive business environment while others fail due to inadequacies by the business owners.
It is only through understanding some of these failure reasons that you can increase the chances of your business succeeding. Business failure is costly especially if you have exhausted all your savings or you are financing the business through debt.
Understanding the possible causes of failure helps in coming up with potential mitigations measures Below are some of the key reasons why businesses fail in Kenya within the first year of operations.
1. Inadequate market knowledge.
It is always important to start a business that you understand or have a competitive advantage. Every business has its unique elements that you need to learn before getting in. This could be in form of the market, marketing, supply chain, seasons, or geographical location.
As a businessperson, you can only understand these elements through research, experience, or mentorship. I have come across people that start a business either because they saw someone do it or because of imagination and grapevine information.
However, the majority of such businesses never make it as it is more of trial and error rather than investment. As an entrepreneur, you need to learn and understand the market before venturing. Make sure to invest in a business that you understand.
How do you gain market knowledge?
- Getting a mentor.
A mentor is an individual who is successful in the line of business you intend to start. You aim to tap from the knowledge and experience they possess by getting into the business earlier.
Mentors help to reduce the learning curve by ensuring you don’t need to learn everything from start.
- Doing market research
There are numerous sources of market information that you can tap to get insights. Some of these include the use of books, online material, or engaging professionals.
As an example, if you want to venture into an agricultural business, you can engage the services of an agricultural professional for market advice.
You can also do market surveys by engaging various people such as competitors or customers to understand their expectations. This gives you information that is key in identifying market gaps and other elements such as pricing.
Experience is the ultimate teacher. Past lessons either of failure or success are key in informing future decisions.
2. Inadequate capital
Starting a business requires capital to facilitate operations. Capital is the investment you put in as a business owner. The amount of capital required depends on various things including;
- The type of business
- Location of the business
- Size of the business
Capital helps sustain business operations until when it breaks even. At this point, a business can sustain its operations. However, it could take longer to break even requiring more capital injections to sustain operations.
If you don’t have adequate capital, it becomes challenging to continue operating and this mostly results in business failure.
Capital challenges are a common problem across developing countries such as Kenya. However, it is your duty as a business owner to have enough capital before starting your business.
Capital challenges arise partly due to a lack of market research. This is the point whereby you should understand all these requirements before making the final decision.
3. Failure to comply with the relevant regulations
Various laws and regulations guide business operations in Kenya. Some of these include;
- Fulfilling the set tax obligations
- Having a business permit
- Complying with the environmental policies
- Compliance with the health requirements
Hence, you need to understand all the legal requirements and obligations before you can set up your business.
However, most people start without ensuring full compliance either intentionally or due to a lack of awareness.
This exposes the business and the owner to a potential legal challenge that could lead to business closure causing business failure. As a business owner, you also risk other consequences such as heavy fines or serving jail time.
For clarity, you should visit the nearest government offices or engage the services of a professional for guidance on the necessary legal compliance requirements.
4. Poor marketing
Marketing is a key strategy for a business to increase its sales. In return, an increase in sales results in growth in profits. However, most businesses lack any marketing effort resulting in low market penetration.
There are also those businesses that use the wrong marketing strategies. This only increases the marketing costs without any increase in income. Such as strategy is not sustainable making it among the reasons why most businesses fail in Kenya.
There are various types of marketing you can use to grow the business. Some of these include;
- Employing direct sales staff– It involves hiring staff that is responsible to do marketing tasks.
- Online marketing– This is the latest form of marketing whereby you promote your business online through various avenues such as social media
- Referral marketing– This is the best marketing as it involves customers recommending your products and services to other potential customers.
Marketing is a continuous process that requires strategic planning and budget allocation.
5. Wrong staffing
Staffing remains an important element that could determine the failure or success levels of a business. The nature of a business determines the number and qualifications of staff to hire.
However, most businesses fail to adequately staff their business or end up hiring the wrong staff. Mostly, this happens when the business is attempting to cut costs on staffing resulting in poor quality both in services and products.
If you want to achieve success in business, you should aim to get the best staff in the market
In case you are facing challenges attracting the right staff, you can engage the services of a third-party recruitment company to do the staffing. Another strategy is to offer competitive packages to attract and retain staff.
Alternatively, you can retrain your staff after hiring them to enhance their skills and build capacity as per the business requirements.
6. Poor Customer service
Customers are the main pillars that drive business success. This is because all businesses make income through offering goods and services to customers.
This makes customer service a key factor the consider if the business is to succeed. However, poor customer service on the other hand results in low customer attraction and retention levels.
In return, this causes low sales resulting in challenges in sustaining the business. In an open market such as Kenya with high competition levels, you should understand that customers have a choice and poor services will push them to competitors.
Good customer service should be a key priority when starting a business. This not only ensures the customers are happy but also helps in marketing through referrals.
Achieving top customer service levels requires constant training of staff and business owners on the changes happening in the market because customer needs are constantly changing and businesses have to strive to keep up with the change.
7. Lack of Insurance
Although most businesses take it as an afterthought, insurance is a key element that could determine whether your business succeeds or not.
Insurance helps take care of emergencies that could hamper business operations such as fire emergencies or theft. The chances of these risks remain especially if you have a physical business.
Most businesses lack awareness about the benefits of insurance while others evade it to avoid paying premiums. However, it is important to analyze the risks that could face your business and take the necessary cover.
In the case of fire or theft, it could result in business failure due to a lack of extra capital to start over again. A position that over 90% of new businesses find themselves in. However, with an insurance cover, you get a percentage refund of your losses from the insurance company.
This could be a key determinant between a business’s failure or continued operations.
To understand the best cover for your business, you should engage an insurance professional for guidance and advice.
8. Lack of innovation
Innovation is what makes a business stand out and full fill the ever-changing customer needs. Before getting into the market, you need to understand the products and services in the market to enable bring innovation and differentiation.
Starting a business to offer similar goods and services already in the market makes It difficult for you to attract customers due to a lack of value addition.
Unfortunately, most businesses in Kenya fail due to the lack of this key element. Taking advantage of innovation requires constant market research and risk-taking.
Market research ensures you are updated on all the changes in the market. In return, this assists to identify arising new market gaps that could propel business growth.
Risk-taking enables a business to pursue innovation even when there is no assurance of paying off. However, it also creates lucrative returns if the idea succeeds through customers embracing it.
Innovation also assists accelerate the business uptake of technology. Currently, all sectors of business have some level of influence by technology making it a key strategy to have. However, lack of it could result in the business becoming uncompetitive in the market resulting in failure
Conclusion on causes of business failure in Kenya
Various factors could lead to business failure as indicated above. However, understanding these challenges helps with better preparation for the mitigation measures.
This is key because no one starts a business to fail. However, without taking the necessary and appropriate measures to ensure success, failure is inevitable.
However, you can always engage professionals to guide you in handling some of these elements in case of challenges in implementing them yourself.