CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to (Ayorinde 2004) in the article „Reasons businesses fail‟, enterprises have been
given due recognitions especially in the developed nations for playing very important roles
towards fostering accelerated economic growth, development and stability within several
economies. They make-up the largest proportion of businesses all over the world and play
tremendous roles in employment generation, provision of goods and services, creating a better
standard of living, as well as immensely contributing to the gross domestic products (GDPs)
of many countries (OECD 2000).
Over the last few decades, the contributions of the business sector to the development of the
largest economies in the world have beamed the searchlight on the uniqueness of the
businesses; and this have succeeded in overruling previously held views that small businesses
were only “miniature versions” of larger companies (Al-Shaikh 1998; Gaskill et al. 1993).
However, it appears that considering the enormous potentials of the small business sector and
despite the acknowledgement of its immense contribution to sustainable economic
development, its performance still falls below expectation in many developing countries
(Arinaitwe 2006).
This is because the sector in these developing countries has been bedevilled by several factors
militating against its performance, and leading to an increase in the rate of small business
failure. These factors include the unfavourable and very harsh economic conditions resulting
from unstable government policies; gross undercapitalisation, strained by the difficulty in
accessing credits from banks and other financial institutions; inadequacies resulting from the
highly dilapidated state of Infrastructural facilities; astronomically high operating costs; lack
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of transparency and corruption; and the lack of interest and lasting support for the SMEs
sector by government authorities, to mention a few (Oboh 2002; Okpara 2000; Wale-Awe
2000).
According to (Bradstreet 1969), a careful examination of several studies on factors
influencing business failure reveal that most of them were mainly independently conducted
studies. They tend to simply identify the factors influencing business failures in businesses in
general, and attach percentage rates to the extent at which these factors were found to
influence failure (Dun and Bradstreet 1969; Altman 1971; Argenti 1976). In addition most of
the studies tend to focus on SMEs in America and other developed countries (Peterson et al.
1983; Theng and Boon 1996). There appears to be inadequacy in comparative studies on the
factors influencing business failure between the developed and developing nations, and even
if there are a few, not much has been done between the UK and Nigeria.
This study attempts to fill this gap. In addition, despite the fact that several research studies
have identified a number of generic factors influencing business failure, it would still seem
inappropriate to assume that the same set of factors would lead to business failure in different
regions and countries.
The significant role of small business in any economy suggests that an understanding of why
small businesses fail (or are successful) is crucial to the stability and health of the economy.
For this discussion we will define Small Business to be an enterprise that is independently
owned and operated for profit that is not dominant in its industry.
Entrepreneurship is linked to creation of jobs, increases in productivity, and improvements of
living standards, and to economic growth in the in general. Small businesses help create new
jobs, introduce new products and provide specialized expertise to large corporations. Small
firms represent about 99 percent of employers, employ about half of the private sector
workforce and are responsible for about two-thirds to three-quarters of the net new jobs.
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Unfortunately, according to the U.S. Small Business Administration, over 50% of small
businesses fail in the first year and 95% fail within the first five years• “Businesses with fewer
than 20 employees have only a 37% chance of surviving four years (of business) and only a
9% chance of surviving 10 years”, reports Dun & Bradstreet and of these failed businesses,
only 10% of them close involuntarily due to bankruptcy and the remaining 90% close because
the business was not successful, did not provide the level of income desired, or was too weak
to continue.
1.2 STATEMENT OF RESEARCH PROBLEM
Wherever a business goes burst, bankrupt or fails there is always a resultant negative impact
of most, if not all, of the stakeholders of the business. Entrepreneurs lose their capital
investments, employees lose their jobs, the society loses a means of the production and
distribution of goods and services, the government loses revenues it would have earned from
tax. It also reduces the standards of living of individuals and brings about the deprivation of
goods and services. The impact of business failure is always overbearing and this is why the
issue is attended to with great concern.
Over the years, the have been several definitions of business failure and a number of theories
and thoughts on what constitutes a failed business. There are some scholars who view
business failure as “discontinuance of business” for any reason, such as Fredland and Morris
(1976). There are others who view failure as “bankruptcy” and the most cited work in this
school of thought is Dun and Bradstreet (1969) and their definition of failure as: those
businesses that cease operations following assignment or bankruptcy; ceased with loss to
creditors after such actions as execution, foreclosure or attachment, voluntarily withdrew
leaving unpaid obligations; were involved in court actions such as receivership,
reorganization or arrangement, or voluntarily compromised with creditors (Watson and Everet
1996). Other views of failure include businesses “disposed of to prevent further losses” and
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“failing to „make a go of it.‟(Watson and Everett 1996). Irrespective of the size of any
business large, medium or small, several researches and statistics appear to have ranked poor
management or management inability the main cause of business failure in general (Argenti
1976; Dun and Bradstreet 1969; Wichmann 1983 amongst other).
Other problems include:
1. Lack of experience
2. Insufficient capital
3. Poor inventory management
4. Over-investment in fixed assets
5. Poor credit arrangement management
6. Poor management decisions,
7. Poor knowledge of the business
1.3 OBJECTIVES OF THE STUDY
The purpose of this paper is to better understand why businesses fail and how those causes
can be avoided. At the end, a framework is presented to evaluate the existing resources and
understand their influence on the factors of failure from a firm level. The intent is that this is
one way that will promote adoption of necessary preventive measures and a plan of action to
avoid such failures. Other objectives include
1. To know if poor management decisions lead to business failure
2. To examine internal and external factors that affects the causes of business failures.
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1.4 RESEARCH QUESTIONS
1. What are the problems and challenges that faces a business?
2. Does Poor management decisions lead to business failure
3. Does sustaining fund lead to business failure?
4. What are internal and external factors that affect the causes of business failure?
5. What are the ways or solution to business failure in Nigeria?
1.5 RESEARCH HYPOTHESIS
Null and alternative hypothesis will be used for general statement of hypothesis.
: Will represent Null hypothesis
H1: Will represent Alternative hypothesis
1. : Poor management decisions does not lead to business failure
H1: poor management failure leads to business failure
2. : Internal and external factors does not lead to business failure
H1: Internal and external factors lead to business failure.
1.6 SIGNIFICANCE OF THE STUDY
The work is also significant as it seeks to shed light on evaluation of the causes of business
failures in Nigeria organization: A case of Sosoliso Airline. Hence, the study is significant to
business owners, intending business starters because of the following
1. Reasons why businesses fail
2. Criteria to put in place before starting a business
3. Need and importance of having both short and long business plan
4. To know the availability of market for your product or services before even venturing
into the business.
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1.7 SCOPE OF THE STUDY
The study talks about evaluation of the causes of business failures in Nigeria organization: A
case study of Sosoliso Airline. To make the research work more reliable and valid, the sample
studies will Sosoliso Airline to know the factors that led to the failure and windup of the
business organization and also means of overcoming failure.
1.8 DEFINITION OF TERMS
Business – is a commercial activity or an organization or economic system where goods and
services are exchanged for one another for money.
Failure- is lack of success or the neglect or omission of a required action.
Business failure- refers to a company ceasing operations following its inability to make a
profit or to bring in enough revenue to cover its expenses.
Bankruptcy- it‟s a process whereby a person or business cannot repay the debt it owes to
creditors.
Management- the organization and coordination of the activities of a business in order to
achieve defined objectives.
Windup- it refers to an act of the business to shut down or bring an end to the business.
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