1.1 Introduction
Business failure refers to the situation where a business ceases operations due to inability to generate sufficient revenue or profit, leading to the inability to meet its financial obligations. It often results in insolvency or bankruptcy. The impact of business failure extends beyond the economic realm, affecting social structures and community well-being. High business mortality rates lead to job losses, which in turn increase unemployment and poverty levels. This creates a cycle of economic hardship that can impede social development and reduce the overall quality of life for many Nigerians. Additionally, the failure of businesses can undermine consumer confidence and lead to a decline in entrepreneurial activities, further stifling economic growth and innovation.
Several factors contribute to the high rate of business failure in Nigeria, including inadequate access to financing, poor management practices, and an unstable macroeconomic environment. According to a report by the Central Bank of Nigeria (CBN), many businesses in the country struggle with limited access to credit facilities, which hampers their ability to sustain operations and grow. Moreover, external factors such as political instability, corruption, and infrastructural deficiencies further exacerbate the vulnerability of businesses to failure (CBN, 2020).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
Business failure is a critical issue that has profound implications for Nigeria's economic and social development. The high rate of business failure in Nigeria can be attributed to a myriad of factors, which collectively create a challenging environment for enterprises to thrive. Understanding these factors and their impact is essential for devising strategies to mitigate business failures and promote sustainable economic growth.
Nigeria's business environment is characterized by significant obstacles, including limited access to financial resources, inadequate infrastructure, and a volatile political and economic landscape. Access to financing remains one of the most pressing issues, as many businesses, particularly small and medium-sized enterprises (SMEs), struggle to secure the necessary capital to sustain and expand their operations. According to the Central Bank of Nigeria (CBN), the lack of accessible and affordable credit facilities is a major impediment to business sustainability and growth (CBN, 2020).
The phenomenon of business failure in Nigeria presents significant challenges with far-reaching consequences for the nation's economic and social landscape. Business failure, defined as the inability of a company to continue its operations and meet its financial obligations, is a prevalent issue that affects various sectors in Nigeria. This issue is not only detrimental to the individual businesses and their stakeholders but also poses a threat to the broader economy by stifling innovation, reducing employment opportunities, and diminishing investor confidence.
Management deficiencies also play a pivotal role in the failure of businesses in Nigeria. Many enterprises suffer from poor managerial skills and lack strategic planning, which are crucial for navigating the competitive and often unpredictable market conditions. A study by Adeoye and Elegunde (2012) highlighted that inadequate managerial expertise and poor business planning are significant contributors to business failures in Nigeria. These internal weaknesses are compounded by external challenges such as corruption, regulatory inefficiencies, and infrastructural deficits.
The macroeconomic environment in Nigeria further exacerbates the vulnerability of businesses. Economic instability, characterized by fluctuating exchange rates, high inflation, and inconsistent government policies, creates an uncertain business climate. This uncertainty discourages investment and makes it difficult for businesses to plan long-term strategies. Moreover, political instability and insecurity in various regions of the country deter both local and foreign investments, further constraining business development (Adeoye & Elegunde, 2012).
The socio-economic impact of business failures is profound. High failure rates lead to significant job losses, contributing to increased unemployment and poverty levels. The World Bank reports that Nigeria's unemployment rate has been on the rise, exacerbated by the high incidence of business closures (World Bank, 2021). This situation not only affects individuals and families but also has broader implications for social stability and economic progress. Additionally, the failure of businesses can erode investor confidence, reduce entrepreneurial activities, and hinder innovation and competitiveness in the economy.
Business is important to our society because we depend on its for various services, while they depend on the environment. Business organization provides our basic needs such as food, clothing and shelter. They also provide us with moisture recreation, entertainment; education, etc. many of us work in business organization and therefore depend on them for our economic and social welfare. One can see that our society cannot do without business organization. Over the years studies in management have often concentrated on large organization which is characterized by impersonal relation, formal structures and personal specialization.
The industrial revolution of the 19th century brought about radical change in the production process with a focus on achieving economic of scale and resources efficiency and effectiveness through large scale production. The large scale capital investment involved in large business make this category of business even risks hence, the need to place close supervision and control on their management as a way to protect the stakeholder interest. However, studies of modern economics have show what it is difficult to achieved balance and sustainable economic growth by depending only on large business organization. Small and large business are known to contribute significantly in building a solid and rural economic base in both developed had been and less developed country.
It has been noted that 75% of business even through there are medium and large scale business which have failed either in the short or long run. In this case, one would want to ask what factors that lead to these business failures and what are the consequences, effect of this failure to the company; employee and the society at large. Small scale business provides the training ground for business men. Experience and skills develop in running employed in large industrial set up. It has been appreciated that the managerial skill and knowledge needed to run large company cannot be developed overnight those who had experience in small scale business management can easily apply such knowledge and skill to manage bigger enterprise.
Many small scale businesses are mainly for the demand of their immediate local environment, and that their proprietor is usually conservative and suspicions unwilling to release information about their business for fear of taxation and unwanted competition. No one aim to start a business which will be a failure, but it has been observed that many businesses have failed to survive, thereby disappointing their proprietor, although they may have contributed to their failure in one way or the other. Small business provide a very strong support for our economic development presently, our economy is dominated by small scale business and even the few existing large scale businesses heavily depend on them in several ways.
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the impact of business failure.
1.3 Statement of Problems
Investigation revealed that one of the primary challenges leading to business failure in Nigeria is the limited access to affordable finance. Many small and medium-sized enterprises (SMEs) struggle to secure necessary capital due to stringent lending criteria, high-interest rates, and inadequate financial infrastructure. This financial constraint hampers their ability to sustain operations, innovate, and expand. According to the Central Bank of Nigeria (CBN), a significant number of businesses cite access to finance as a major barrier to their growth and survival (CBN, 2020).
Additionally, management deficiencies are another critical factor contributing to business failure. Many businesses lack the managerial expertise required to navigate complex market dynamics, develop strategic plans, and implement effective operational controls. This inadequacy often results in poor decision-making, inefficiencies, and ultimately, business closure. Research by Adeoye and Elegunde (2012) indicates that inadequate managerial skills are a significant cause of business failures in Nigeria.
Furthermore, in recognition of the fact that causes of business failure in Nigeria is high priority to the survival on any business concerned. The impact is very substantial objectives or goals and the end towards which activity is aimed. They represent not only the point of planning but also the end toward which organizing, staffing directing, leading and controlling are aimed. The rampant folding up both small and large business organization in the recent time have stemmed from mismanagement by owners and inability to perform managerial function coupled with lack of managerial skills. Properly train and educated in other to find the cause of business failure in small business enterprise in federal polytechnic environment.
1.4 Aim and Objectives of Study
The aim of the study is to investigate the causes and solutions of small scale business failure in Nigeria using Ethiope East Local Government Area as a case study. In achieving this aim, the following specific objectives were laid out as follows:
- To assess the role of access to finance, management practices, and infrastructure in influencing the success or failure of small businesses;
- To analyze the effectiveness of existing government policies and regulatory frameworks in supporting business sustainability;
- To assess the impact on families and local communities resulting from increased unemployment and reduced economic activity;
- To determine the broader economic implications of high business mortality rates on Nigeria's economic development;
- To determine the causes of business failure in the area under study; and
- To examine the role of financial constraints, managerial deficiencies, and infrastructural challenges in the sustainability of businesses.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What are the impact on families and local communities resulting from increased unemployment and reduced economic activity?
- What are the broader economic implications of high business mortality rates on Nigeria's economic development?
- What is the impact of economic instability and regulatory complexities on the performance and sustainability of small-scale enterprises?
- What are the causes of business failure in the area under study?
- What is the effectiveness of existing government policies and regulatory frameworks in supporting business sustainability?
- What is the role of financial constraints, managerial deficiencies, and infrastructural challenges in the sustainability of businesses?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Economic instability does not significantly affect business survival rates in Nigeria.
- H1: Economic instability significantly affects business survival rates in Nigeria.
Hypothesis Two
- H0: There is no significant correlation between infrastructural deficiencies and business failure rates in Nigeria.
- H1: Infrastructural deficiencies are positively correlated with business failure rates in Nigeria.
Hypothesis Three
- H0: Business failures do not have a significant impact on employment and poverty levels in Nigeria.
- H1: Business failures have a significant negative impact on employment and poverty levels in Nigeria.
Hypothesis Four
- H0: Business failure does not have significant relationship with payment of tax to government.
- H1: Business failure has significant relationship with payment of tax to government.
1.7 Significance of Study
The significance of studying the failure of small-scale businesses in Nigeria extends to various stakeholders involved.
- For policymakers, understanding the causes of small business failures can guide the development of targeted policies and regulations that foster a more supportive business environment. This can lead to improved economic stability and growth.
- Business owners and entrepreneurs will benefit from insights into the factors contributing to failure and practical solutions to address these challenges. By implementing recommended strategies, they can enhance their business practices, access better financial resources, and improve their chances of success.
- Financial institutions and investors will gain valuable information on the risks associated with small-scale businesses and the types of support that can mitigate these risks. This can lead to more informed lending and investment decisions, ultimately contributing to the growth of the small business sector.
- Academic researchers and educators will find the study valuable for understanding the dynamics of small business failures and for developing educational programs that address the identified issues. This can enhance the training and support provided to future entrepreneurs.
- Lastly, the general public and local communities will benefit from a more robust small business sector, which can drive economic development, create job opportunities, and improve local livelihoods. Addressing small business failures contributes to broader economic stability and community prosperity.
1.8 Scope of the Study
The scope of the research is focused on the Causes and Solutions of Small Scale Business Failure in Nigeria using Ethiope East Local Government Area as a case study.
1.9 Limitations of the Study
The study on the failure of small-scale businesses in Nigeria faces several limitations. Data collection may be constrained by limited access to reliable and comprehensive data on small businesses, which can affect the accuracy and representativeness of the findings. Additionally, the study may encounter difficulties in obtaining candid responses from business owners due to fear of exposing their business challenges or failures, potentially impacting the depth of insights.
Geographical constraints might also limit the study's scope, as the challenges and solutions identified may vary significantly across different regions of Nigeria. This could result in findings that are not fully generalizable to all areas.
Time and resource constraints could affect the thoroughness of the study, limiting the ability to conduct extensive fieldwork or longitudinal analysis. Finally, external factors such as economic fluctuations or policy changes during the study period could influence the results, making it challenging to isolate the specific causes of business failure and the effectiveness of proposed solutions.
1.10 Definition of Terms
Small Scale Business:
It refers to enterprises characterized by their limited size in terms of capital investment, number of employees, and scale of operations. In Nigeria, small-scale businesses are typically defined as those with a workforce of fewer than 50 employees and annual turnover below a specified threshold, which can vary depending on the sector and regulatory framework (SMEDAN, 2021).
Business Failure:
This term denotes the inability of a business to continue operations or meet its financial obligations, leading to closure or bankruptcy. Business failure can be attributed to factors such as insolvency, poor financial management, and inadequate market demand (Adewale & Adebayo, 2021).
Access to Finance:
It refers to the ability of businesses to obtain funding from various sources, including loans, grants, and investments. Limited access to finance is a significant barrier for small-scale businesses, affecting their capacity to start, sustain, and expand operations (Olufemi & Salami, 2019).
Management Practices:
It involves the strategies and methods employed by business owners and managers to plan, organize, and control business operations. Poor management practices include ineffective planning, resource misallocation, and lack of strategic vision, which can contribute to business failure (Akinwale, 2020).
Infrastructural Challenges:
It refers to deficiencies in essential services and facilities that support business operations, such as power supply, transportation networks, and communication systems. Inadequate infrastructure increases operational costs and reduces business efficiency, impacting the overall success of small enterprises (Ogunleye, 2018).
Economic Instability:
It describes fluctuations in economic indicators such as inflation rates, exchange rates, and overall economic growth, which can create an unpredictable business environment. Economic instability can affect business performance and increase the risk of failure (Nwokoro & Ezeani, 2020).
