10 reasons why small businesses fail
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Posted: Wed 9th Aug 2023
For most business owners, the reason to set up their business was much more than simply generating an income. Indeed, many would describe it with words like 'dream', 'passion', 'freedom' or 'work-life balance'.
Unfortunately, one in five new businesses don’t make it to the end of their first year, only 50% make it to five years and fewer than one-third will be celebrating 10 years in business.
On the other hand, even passing the 10-year mark still doesn't grant you a 'will never fail' badge, as the reasons behind most of these failures could affect your business at any stage of its life.
So why, and how, do so many businesses fail? What can you do to future-proof your own? First off, here are some of the top reasons why businesses go wrong.
They don't understand the market
Many entrepreneurs go into business with a great new idea, with high revenue expectations, but without an accurate understanding of their target market.
The market is incredibly complex. And while there are models and tools that can provide insight into potential success, there are also times when there is really no way to predict success or failure until you get the product to market and see how it does.
This is true even if you started with an accurate view of the market. But then market conditions change before the business is established enough to weather those changes. The coronavirus pandemic was a perfect example of changing market conditions that caused (and continue causing) many businesses to struggle or fail.
For some businesses in their early days without much cash to fall back on and without an established customer base, the huge market changes were too much for them to survive and the entire venture amounted to not much more than a series of false starts.
However, it helps to start with market research and SWOT analysis, which you should maintain and update on a yearly basis, to make sure you're on the right track.
Cash flow issues
You need to know how to track the money coming into and going out of your business – even a profitable venture will fail if it runs short of cash. You also must learn to make cash flow projections that will help you decide how much money you can afford to spend and warn you of impending problems.
One of the more common mistakes is poor financial planning, especially undercapitalisation. This is when a company does not have enough capital (money) to conduct ordinary business operations, taking out expensive high-interest loans and withdrawing cash that belongs to suppliers (creditors) or HMRC (taxes).
Lack of planning
Having a business plan is essential, and just about everyone knows you're supposed to have one in the early stages of any small business.
A flawed business plan doesn't consider factors that later become important and can cause a business to fail rather than succeed. Some common business plan flaws include:
being too vague
miscalculating costs
underestimating timelines for production or marketing
getting key facts wrong when researching the market
Start with realistic but precise goals for your business, including deadlines. For example, don't just say that you want to increase sales; instead, decide that you want sales to increase by a specific value over the next six months.
Then, write down the steps you can take to meet those goals on time, and set deadlines for completing those steps.
If you can't review your goal list every day, make sure you do it at least once a week. That way, you can be sure you're doing what you need to do to meet your objectives.
Sometimes you'll be able to overcome these difficulties. Other times, they might prove terminal. But in almost every case, you can avoid them by seeking professional on time.
If you don't want to hire an expert, it does help to get assistance from people with real-world experience who may be able to point out your flaws so you can correct them sooner rather than later.
Ineffective marketing
Marketing is not a nice-to-have element of your business plan that you'll implement when you have time or resources. Marketing is about how you'll achieve the results you expect on your business plan. The sooner you realise it, the better.
If you don't have time to market your product effectively, hire an experienced person to do it for you.
Marketing keeps your products selling and money flowing into your business. It's crucial that you do it well. Once you attract customers, you'll have to work hard to keep them.
Customer service should be a key aspect of your business. If you don't follow through with your customers, they'll find someone who will. Inadequate knowledge of the market and ignoring customers' needs and wishes and emerging market trends is a common cause of businesses failing.
Consumer loyalty has declined sharply in recent years. Today, customers go where they can find the best products and services, even if that means breaking off long-term business relationships.
Monitor your competitors, and don't be ashamed to improve on their best ideas (assuming that doesn't mean violating patent law). Better yet, devote some time each week or month to devising new methods, products or services for your business.
Poor recruitment practices
Most successful businesses will credit their team for much of their success, because unique people with creative ideas are better at figuring out how to make things work in the best possible way. The personality and character of your top team members is often reflected in the organisation in crucial ways.
Similarly, if key staff have serious flaws, those are also likely to be reflected in the organisation and often contribute significantly to its failures.
That said, only hire workers who are essential to your operation. When you do hire employees, make sure they’re well trained and able to complete the tasks expected of them.
Make sure you retain good team members – especially at management level. Happy employees make good workers. Try to create a work environment that keeps your staff happy and motivated.
Also make sure you have the relevant management skills when it comes to motivating and managing staff and delegating tasks to others.
It means a powerful and empowering culture is a key factor in organisational success.
Susana is available to provide more support to your business. Connect with her on Enterprise Nation today.
Failure to learn from mistakes or make adjustments
You're probably all too familiar with the issues mentioned above, but what about the less acknowledged reasons why businesses fail?
One of the most common is when management doesn't learn from the inevitable mistakes and make adjustments to become more successful.
Persistence is very important but failing to adjust to a better way of doing things could be disastrous, as it only works if the business model is sound, and the right decisions are made along the way.
Indecisiveness and procrastination
Indecisiveness is when you're unable to decide, conclude or resolve something. Fear of making the wrong decision is one of the reasons why many people hesitate when faced with a choice. You may be afraid of failure or even the consequences of success.
As a leader, you can't avoid making decisions. That's because not making business decisions is a decision in its own right. The difference is that you have control when you make your own choices.
Indecisiveness entails letting decisions, and their accompanying consequences, be determined for you. Having choices made for you is often fine if you work for someone else. However, no company runs itself. As a business owner, if you don't take the wheel of your business, it will crash.
On the other hand, when you own a small business, tasks and paperwork pile up on your desk. Putting them off is like piling up debt; eventually, they could overwhelm you.
An unwillingness to dedicate the necessary hours to keep basic administrative work done is one of the reasons small businesses don’t survive. This is why considering outsourcing payroll, VAT and tax returns as well automating collections and credit control could reduce pressure and keep things on the right path.
Burnout or loss of passion
Consistency is a key element for long-term success and failure to maintain a consistent approach and analyse results could increase your business's distress.
Many business owners fall in love with new ideas but get tired of them before they can reach their full potential and want to move on to the next great idea.
We've seen many business owners who couldn't recover their passion for their business after hard times. That's why it is so important to take time out to reflect on the big picture.
Business resilience is the ability an organisation has to quickly adapt to disruptions while maintaining continuous business operations and safeguarding people, assets and overall brand equity.
Lack of expertise
You may be an excellent personal trainer, but that isn't enough to make your personal training business successful.
Business owners tend to believe that they will excel at a number of tasks, from accounting to marketing to hiring staff. Although at the beginning of the venture, you have to identify the moment when you do not have the necessary skills to keep the momentum going – it's key to future-proofing your business.
When you don't have time to focus on the important, that's the moment to stop and reassess your business and your role in it. Do you behave like a full-time employee or the leader of your business?
Poor network
It's important to develop a broad and diverse network, not only to keep you up-to-date on industry and financial changes but as part of your personal and professional development.
When your employees need advice, they will look to you for the answers. So, it's important you have a network you can approach for advice and run your ideas by before you make important decisions and financial commitments.
Read books and magazines, listen to podcasts about small businesses, visit business-related websites and network with your peers in the business community.
Embrace new approaches – it doesn’t mean you need to agree with all of them, but at least keep an open mind.
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