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Entrepreneurship is the process of setting up new firms or businesses or energizing existing organizations. There are myriad benefits of embracing entrepreneurship for instance, job security, creation of employment and flexibility in terms of working hours. However, the art of starting businesses is not often easy, and thus many businesses fail shortly after start-up. This paper will investigate how overconfidence in entrepreneurship may have detrimental effects and some possible reasons that lead to the failure of small businesses.
Entrepreneurs start firms with the purpose of succeeding and generating returns from their investment. The objective of making profits is not bad in itself, but often it clouds personal judgment, and the result is hasty investment decisions. It is true that when starting a business, many people will tend to talk negatively claiming that doing business is not a good idea and that one should venture into something else. A large percentage of the comments may be misleading, but some of the concerns are genuine. Research shows that many entrepreneurs ignore other people’s suggestions and proceed with their business intentions. The implication of the school of thought is that it instills overconfidence in entrepreneurs, which sometimes works against them.
There are three main causes of overconfidence, prediction, knowledge and abilities. An entrepreneur may be overconfident in knowledge in the sense that he perceives himself to be educated than he is. In the context of entrepreneurship, prediction is a source of overconfidence in that one can miscalculate risk involved in starting a venture. Strong belief in personal abilities of an entrepreneur lead to the feeling that his exceptional skills will make him succeed where others have failed (Everett 7).
Factors That Cause Business Failure
Poor planning adversely affects the success of small businesses. In any venture prior planning prevents failure. Lack of proper planning implies that the firm has no specific objectives or targets to meet. Therefore, if a firm aims at nothing it will definitely hit nothing. The angle of planning may be a cause in business failure. Statistics show that most small businesses have plans that solely focus on sales. Small business owners often have no formal training, thus poor planning skills that eventually lead to business failure (Mbonyane 18).
The customer is the key factor in the business world. Maintenance of proper customer relations determines the success or failure of a business. A firm should build a lasting relationship with the customers by giving them the right of safe commodities, right to know and right to speak and choose. Adherence to the stated rights will ensure success of a business Deviation from giving customers their rights will lead to business failure (Mbonyane 21).
Budget management is a key skill for the survival of any business. Small firms often lack formal training, thus; they are unable to use the discounted cash flow approach in their capital budgeting decisions. Further, small businesses have limited access to capital for expansion of their business due to inadequate assets to act as collateral security when securing loans (Mbonyane 22).
In conclusion, starting a new business requires proper research in every aspect to realize success. Entrepreneurship requires one to have a strong belief in personal skills and abilities. Entrepreneurs should exercise caution to safeguard themselves from overconfidence, which may lead to hasty decisions and adversely affect the success of new start-up businesses.
Works Cited
Everett, Craig R. Entrepreneurial Overconfidence, Outside Equity And Successful Exits. Vol. 44. Malibu: N. p., 2009. Print.
Mbonyane, Boysana Lephoi. “An Exploration of Factors That Lead to Failure of Small Businesses in the Kagiso Township by Business Administration.” University Of South Africa, 2006. Print.
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