The failure rate of MSMEs in the first year reaches 50%.

The failure of MSMEs has become a major challenge for the business world in Indonesia. Data from the Ministry of Cooperatives and SMEs show that approximately50% of MSMEs fail to survive in their first year of operation., while only a small portion is able to get through the first five years of the crisis. This phenomenon emphasizes that building a business is not just about ideas and enthusiasm, but also about strategy, management, and readiness to face market dynamics.

First-Year Failure Risk Map for SMEs

Micro, small, and medium enterprises have long been the backbone of the national economy. However, behind its vital role, this sector also harbors a high level of vulnerability. According to Professor of Economics at Padjajaran University, Prof. Yuyun Wirasasmita,On average, 50–60% of MSMEs stop operating within the first three years., and almost 80% fail within five years. The culinary sector even records the highest failure rate. 90% of food and beverage businesses go out of business in their first year., followed by the fashion and services sectors.

The causal factors are not singular. The combination of weak planning, financial mismanagement, and competitive pressure has become the main cause. Macro conditions such as pandemics, inflation, and changes in consumer trends have also worsened the situation. Thus, the first year becomes the most decisive phase for the future of a business.

Internal Factor: The Fragile Foundation of the Business

Immature Business Planning

Many entrepreneurs start a business with nothing but enthusiasm, without a clear business plan. As a result, decisions were made without data and the strategic direction was unclear. Without a written plan, business actors have difficulty measuring targets and navigating market changes.

Poor financial management

Financial problems have become a "silent killer" for many SMEs. Ministry of Cooperatives and SMEs data records77.5% of business actors do not have proper bookkeeping.Personal and business finances are often mixed, causing negative cash flow and the business to lose control of working capital. Global research also notes that 82% of small businesses fail due to mismanagement of cash flow.

Product Not Suitable for the Market

Mistakes in reading consumer needs are a classic trap. Many MSMEs sell products according to the owner's taste, rather than based on market research. Without validation, the product doesn't sell, and customers switch to competitors. The lack of differentiation makes the business difficult to be known.

Weak management of HR and operations.

In the early days of a business, the owner often wears all the hats: manager, accountant, marketing, and even operator. Without division of tasks and a control system, service quality tends to decline. Operational weaknesses such as inventory management and poor service disappoint customers.

Low mentality and adaptability

A rigid attitude toward change is the main enemy of business sustainability. Many entrepreneurs are reluctant to learn digital marketing, reject innovation, and quickly give up when faced with minor failures. In fact, the business world demands mental resilience and flexibility.

External Factor: Challenges from the Outside that Squeeze

Fierce market competition.

With more than65 million MSMEs in Indonesia, the market becomes very crowded. Price competition and product differentiation have become a gamble. Small and micro enterprises have difficulty competing with large companies that have capital and a professional team. In the culinary and service sectors, many new entrants appear every month—and most disappear quickly.

Limited access to capital

Only20% of MSMEs that have formal credit access., according to Bank Indonesia. The majority still relies on personal capital. When sales are slow and operating costs are high, the business runs out of funds before reaching the break-even point. Bureaucracy and high loan interest rates are becoming more pressing.

Legality and Regulation

The low level of legality further exacerbates the failure. As of 2023, only 5.8% of MSMEs have a Business Identification Number (NIB). Without official authorization, they have difficulty obtaining contracts, government assistance, or entering a large marketplace. Policy uncertainty also adds to the burden.

Changes in consumer trends and behavior

Consumers are now rapidly changing in every way. Culinary trends, fashion trends, and even digital services can shift within a matter of months. MSMEs that are not quick to adapt their products and marketing strategies will lose momentum. The KADIN survey mentions.74% of MSMEs have never conducted market research.before launching a product.

The low level of digitalization.

Of 64 million MSMEs, only 19 million have already gone digital. The low level of technological literacy makes it difficult for businesses to reach broad markets. Without a presence on e-commerce, Google Maps, or social media, new businesses will be outcompeted by competitors who are active online.

Analysis Based on Sector

Culinary Sector: Rapid Growth, Rapid Fall

The food and beverage industry is the darling as well as the most risky sector. The Foodizz survey mentions90% of culinary businesses fail in the first year.The causes are varied: inefficient stock of ingredients, non-strategic location, minimal menu innovation, and weak marketing. Inconsistent taste quality and poor service accelerate customer attrition.

Fashion Sector: Capital Challenges and Fast Trends

Local clothing and distro businesses are growing rapidly thanks to social media. However, many fail because they can't keep up with the 'fast fashion' trend. Stockpiling, locked-in capital, and weak management. The lack of branding and innovation makes local products fall out of favor compared to cheap imported goods and thrifting.

Service Sector: Difficult to Build Trust

Businesses like laundry services, salons, and digital agencies face obstacles in building a reputation. The first clients are hard to obtain, and the quality of service determines the viability of the business. Pricing mistakes, poor service, and a high burn rate cause many small service providers to close within a year.

Survival Strategy: From Failure to Success

1. Clear Planning and Vision

Successful SMEs start with a solid plan: market research, financial targets, and promotional strategies. They are not just selling products, but building a sustainable business model.

2. Financial Discipline and Cash Flow

Separate personal and business accounts. Record all transactions. Focus on maintaining liquidity before expanding. This simple principle determines the age of the business.

3. Adaptive and Quick to Learn

Markets change quickly; the entrepreneurs who survive are those who are willing to learn. Many businesses succeed because they quickly pivot to meet demand. Adaptation to digital trends is also key.

4. Focus on Quality and Customers

Maintaining product quality and service creates loyal customers. MSMEs that place customers at the center of their strategy stabilize and grow faster.

5. Effective Digital Marketing

Creative content, social media promotions, and collaborations with influencers have become cheap but effective weapons. MSMEs that are digitally active have proven to be more resilient to economic shocks.

The Role of Government and the Business Ecosystem

The government has implemented various programs to reduce the failure rate of MSMEs: management training, simplified licensing through OSS, low-interest KUR financing, and business incubation. ProgramPaDi UMKMand target70% of MSMEs go digital by 2025to become an important milestone.

An incubation scheme as it is run.Ministry of Cooperatives and SMEsand various universities have proven to help new entrepreneurs get through the critical period. An incubator provides mentoring, market access, and legal assistance. With this support, many MSMEs that were previously vulnerable are now able to survive and grow.

Lessons from Other ASEAN Countries

The failure patterns of Indonesia's MSMEs are similar to those of neighboring countries such as Malaysia, Vietnam, and Thailand. The main problem remains the same: limited capital, weak management, and lack of innovation. The difference is that Indonesia's level of digitalization is still lagging—only 8%, compared with Vietnam's 35% and Singapore's 65%. The aforementioned countries succeeded in reducing the failure rate through easy access to financing and structured business training.

The failure of MSMEs in the first year should be a national alarm. With50% of businesses fail before they reach one year., it is clear that the sustainability of entrepreneurship is not enough with enthusiasm alone. Disciplined financial management, digital adaptation, and strong ecosystem support are required. The government, academics, and the business community need to work synergistically so that SMEs are no longer victims in the first year, but rather a foundation for a resilient economy.

For further reading on digital MSME strategies and adaptive business management, visit another article atInseminationthat discusses the transformation of small businesses in the technology era.