Small firms failure trajectories

Thursday, 4 April 2013: 5:30 PM
Jaroslaw Ropega, Ph.D. , Department of Entrepreneurship and Industrial Policy, University of Lodz, Faculty of Management, Lodz, Poland
The main aim of the study presented in the paper was the analysis of the reasons and processes that accompany small business failure. The achievement of this objective requires in particular the review of the business failure paths of small companies.

The main hypothesis assumed in the study asserted that: business failures of small companies are the result of a process specific for this type of companies. In the course of this process, symptoms of failure can be observed and their early identification provides a warning for the entrepreneur and allows to take corrective action. Only the clear deterioration of the company’s financial standing forces entrepreneurs to examine the internal situation of their company.It is not the occurrence of individual symptoms but their combination encompassing various areas of the company that indicates poor standing of a company which may lead to business failure; non-financial symptoms are often not noticed or are underestimated by small company owners. 

From the perspective of business failure prevention, it is important to notice negative signals coming from the organisation before the situation of the company deteriorates to the point that it is noticed by external observers. Then the appropriate response to such symptoms may allow the company to leave the path of failure. Taking into consideration the aim of the paper and its main hypothesis, it can be said that despite the limited number of financial indicators applicable in a small company, it is possible to notice financial symptoms that warn of business failure;

The paper will be presented a qualitative research method. The quality study was conducted in 2011 – 2012 in liquidated small companies in Poland. 20 liquidated companies chosen from among 1,000 randomly selected deletions from the register of Company were conducted in order to trace how a path of the failure ran in every case. For each case, information was gathered in interviews with owner.

The results of the qualitative study indicate that company failures in the SME sector can be classified into different failure paths and comprise all the categories enumerated in literature. This outcome indicates that most of the entrepreneurs surveyed indicated changes in the environment as a reason for the business failure and mismanagement.