If you are thinking of starting your own business or venture, you should focus on maintaining it over the years to achieve success. But, do you know why SMEs go bankrupt nowadays? Below, we tell you the main reasons for this situation so you can avoid being the next one to be affected.

What is an SME?

An SME is no more than a small or medium-sized company in relation to the volume of revenue and the number of employees it has.

In the case of Europe, SME revenues must be less than EUR 50 million, have a balance sheet equal to or less than EUR 43 million, and have fewer than 250 employees in their organizational structure.

According to the UN, these companies represent the backbone of the global economy, accounting for around 50% of the world’s GDP and 70% of jobs.

For this reason, it is important to know why SMEs go bankrupt, in order to prevent a negative economic impact that could affect us worldwide.

SMEs in Spain

According to the General Directorate of Industry and Small and Medium Enterprises, by March 2022, there will be 2,924,303 SMEs in Spain, of which 1,124,756 are classified as microenterprises.

In addition, the Ministry of Industry, Trade and Tourism released, in April 2022, the predominant sectors in which SMEs develop their activities in the country. And these are the following:

• 73% of SMEs are engaged in the service sector

• 11% of SMEs are engaged in construction work

• 9% of SMEs are engaged in the agricultural sector

• 6% of SMEs operate in the industrial sector

On the other hand, we understand that with the arrival of the COVID-19 pandemic, multiple businesses were affected, and in the case of microenterprises it was common to witness the constant closure of their activities due to the impossibility of sustaining themselves economically.

In this way, today we can witness initiatives in Spain such as the Digital Kit, which contributes to the financing of SMEs and favors their expansion in the market.

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Main reasons for the failure of an SME

When talking about small and medium-sized companies, it is common to think about achieving success quickly, simply because they are smaller companies.

However, the reality is that there are many factors that can cause them to fail, and here we will tell you why SMEs fail and what the main reasons are:

Lack of leadership

Regardless of the size of your company, you should focus on establishing a complete vision of its structure and the work method that best suits it, in order to lead and connect with your team, assign responsibility, and delegate functions that benefit your SME.

Lack of planning

This is probably one of the main causes of the failure of an SME. Therefore, you should take into account that improvising the management and the activities to be carried out is not a good idea.

Lack of planning will only result in a mess in your daily tasks that will cause budget failures in your business.

3. Lack of knowledge of the market

Entrepreneurs’ eagerness to start their business often results in overlooking the need to conduct a market study, and the needs of consumers are left aside.

In order to sell your product or service, you must take into consideration the opinion of your audience and avoid poor customer service that could lead to the failure of your small or medium-sized business.

4. Unsustainable growth

Believe it or not, the constant expansion of a business can cause it to fail. But when does this happen? When you do not foresee the risks involved, when you seek uncontrolled growth thinking that it will benefit you, when you apply for financing and credits with the bank that you cannot assume, among others.

In this sense, before saying yes to any possibility that comes your way, you should make a business plan and establish limits and a strategy that will allow you to grow intelligently.

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5. Trying to cover everything

You cannot take care of all the tasks to satisfy all the latent needs in the market. Even if you have a small business, defining what you want to offer, establishing roles and assigning responsibilities will be the key to avoid the failure of your business.

In addition, over time you will realize in which areas you will have to place greater emphasis and rely on new material or human resources, if necessary.

6. Lack of legal knowledge

When you start an SME, you have to take into consideration that there are several fiscal and legal obligations that you must comply with. Otherwise, you will gain inconveniences that affect the welfare of your company and may cause its failure.

Likewise, if you find it difficult to understand how to manage business taxation, you can turn to various consulting firms for advice, such as TAS Consultoría, in Spain.

7. Lack of cash flow control

Not knowing how much money is coming in and going out of your business is detrimental to business success. And, SMEs are no exception, since not having an accurate control over the expenses and profits you generate, it is very likely that you will lead your business to bankruptcy without realizing it.

8. Lack of Internet presence

Nowadays the Internet is everything for consumers, and in some cases if you do not adapt to this reality, you can end up hurting your SME. Therefore, incorporating new technologies and digital tools will be a plus that will facilitate the buying process to your customers and help you to penetrate the market in which you operate.

9. Errors in inventory management

Just like having an out-of-control cash flow, not having an up-to-date inventory can bankrupt you faster than you think.

Avoid falling into a constant shortage or excess of products in your stock and rely on the automation of functions to properly organize the inventory in your business.

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Now that you know better why SMEs go bankrupt nowadays, you have a better vision of the aspects that you should take into account to avoid having a bad time managing your business. In addition, we remind you that in TAS Consulting we have a team of experts that will offer you the advice you need at every stage of your business. Would you like to contact us? Click here!