The growth of Micro, Small and Medium Enterprises (MSMEs) in Indonesia is very fast. According to the Ministry of Cooperatives and SMEs (Kemenkop UKM), the number of MSME players in Indonesia is recorded at 64.2 million units in 2021.
In fact, MSME players also contribute greatly to Gross Domestic Product (GDP) in Indonesia. The MSME sector contributes to GDP by 61 percent, or Rp9,580 trillion, and the contribution of MSMEs to employment reaches 97 percent of the total workforce. However, the increase in the contribution of MSMEs to GDP is not directly proportional to their development evenly. Apparently, there are still many MSME players who experience losses until they finally go bankrupt and close their businesses. In fact, according to an international survey, more than 80% of MSMEs in Asia close in their third year of existence. The reasons vary, ranging from lack of business knowledge to lack of business capital. So, if you are an MSME player or want to start a micro, small and medium scale business, prepare yourself immediately by learning the following causes of MSME bankruptcy.
What Causes MSMEs to Go Out of Business?
Building an MSME business is not easy. If it doesn’t have the right strategy, it can quickly go out of business. Chances are, this could also happen to your business. Reporting from sukoharjo.pikiran-rakyat.com, there are 25 percent of MSME businesses that go out of business in the first two years, 45 percent that fail after five years, and 65 percent whose businesses fail after 10 years. So, on average, they are not able to survive for a long period of time. So, why is this sector, which has a contribution equivalent to Rp9,580 trillion, so vulnerable to failure and going out of business? Here are some of the reasons as reported by various sources:
Lack of Digitization
The first reason why many MSMEs in Indonesia fail and go out of business is the lack of digitalization. As consumers, we may already be ‘digital’, but in business, in fact there are still many who do not understand and not many have gone digital. Launching from Katadata, the reasons why MSMEs in Indonesia still find it difficult to carry out digital transformation are due to lack of digital training, lack of financing, no business mentors, and inadequate infrastructure. Data from the Ministry of Communication and Information also shows that of the 64 million MSMEs spread throughout Indonesia, only around 29 percent or 19 million units have been digitized or do business online. Compared to neighboring countries, the level of digitalization of small businesses or MSMEs in Indonesia is only around 8 percent, while Singapore is 65 percent and Vietnam is 35 percent. That’s a long way off, isn’t it?
Competition from Large Companies
The second reason that causes MSMEs to go out of business is related to competition from large companies. Related to this, MSMEs fail to compete because large companies have more capital and human resources. This is shown from the Ministry of Cooperatives and SMEs, where MSMEs in Indonesia that can create formal and structured businesses are only around 17 percent. In fact, even if it is only a small business, if it uses a good and appropriate business plan, it will be easier to develop than those who do not use it at all. With a good business plan, of course, the business will be more adaptable to all possibilities, including the presence of competitors from large companies.
Hard to Keep Up with Trends
Talking about trends, it is not only about what is hype among the public, but also related to changes in consumer habits (customer behavior). Based on a survey from McKinsey & Company, the percentage of MSMEs in Indonesia that utilize digital tools such as Google Trends, Google Analytic, and so on is only around 10 percent. Meanwhile, based on survey data from the Chamber of Commerce and Industry (KADIN), 74 percent of MSMEs also generally do not conduct market research before creating and marketing new products. Most of them only use their feelings when launching products. Therefore, as an MSME actor, it is important to be sensitive and see the changes around you.
Overly Focused Market
The next cause of MSME bankruptcy is a market that is too focused, so that the target market becomes very narrow and less widespread. Aiming for a specific market does allow for relatively few competitors. However, this can also backfire because it will be difficult to find new markets with more potential.
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In this regard, MSME players are not required to change the target market. However, what needs to be done is to analyze the business concept. With the products you have, try to review who your target market is. Also analyze the behavior of the target market and learn how competitors are targeting them.
No Business Legality
The last cause of the collapse of MSMEs is related to business legality. Yes, there are still many MSMEs that do not have legality for business licensing. In fact, this is an important thing for MSMEs to obtain legal certainty. Indirectly, legality also provides a guarantee for MSMEs to be able to carry out larger business cooperation in the future. Where MSME players can also collaborate with other parties and enter into a larger supply market. As a first step, MSME players can register their businesses to obtain a Business Identification Number (NIB). Furthermore, they can complete other legality documents such as Trading Business License (SIUP), Micro and Small Business License (IUMK), and Taxpayer Identification Number (NPWP) of course. Those are the five reasons that cause MSMEs to go out of business. Related to this, awareness of the importance of MSMEs for the sustainability of the national economy must be outlined in policies and regulations from the government to be able to manage and strengthen the role of MSMEs so that they can continue to grow and develop.
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From the five causes above, it can be concluded that in addition to business plans, market research, and digitalization, legality also plays an important role in preventing MSME bankruptcy. Where, MSMEs can avoid legal sanctions and fines, protect assets and reputation, and maintain credibility in the eyes of consumers. So, are you ready to run a sustainable MSME and avoid the risk of going out of business? Or are you still confused about the process that must be done, including not fully understanding business legality? Take it easy, Kontrak Hukum is ready to help you! In order to help MSMEs to survive and be competitive in the future, we provide services to fulfill their business needs, including the fulfillment of legal documents.
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No need to worry, because only at Kontrak Hukum, you can get the most complete, reliable, and affordable services according to your business needs! For more information, you can visit KH Services – Starting a Business page. Or if you still have other questions, do not hesitate to consult for free at Tanya KH and via direct message (DM) to Instagram @kontrakhukum.
