Although the UK economy is filled with innovative and successful small businesses, business failure is still a common reality. Unfortunately, the small business failure rate in the UK is gloomy. Statistics state that 20% of small businesses fail in the first year, while 60% fail in the first three years.
But why is this the case? What are the major causes of business failure? Before we answer this question, it’s important to give you a definition of business failure to fully comprehend what it consists of.
Business failure refers to a company closing its doors due to insufficient profits, and limited revenue and cash flow to cover expenses. In short, a company will cease its operations if it cannot match its financial obligations.
The aim of this article is not to demotivate or scare you. Rather, it is to emphasise the reality of what it takes to run a successful small business, and how you can mitigate certain risks. It’s crucial for a small business owner to understand the reasons for business failure. Here’s why:
- Success does not exist without failure.
- It helps you learn from setbacks, so you can find recovery strategies.
- It gives you the opportunity to reflect, take action, and grow.
Now, let’s list the reasons why businesses fail, and how to avoid them.
Common reasons small businesses fail
Safeguarding your small business is essential, and part of that process is understanding why failed companies get to this point. Here are five reasons why businesses fail.
Financial problems
One of the main reasons for business failure is running out of money. This can be attributed to underestimating your running costs, a decrease in sales, poor cash flow management, or being rejected for financing.
Running a business is expensive; wages, rent, utilities, vendor contracts – the list goes on. If you are disconnected from your financial processes, you will experience shortfalls and possible insolvency.
Lack of vision
If you don’t have a clear purpose or vision, you can’t expect to have a clear roadmap for your business. This is where an effective business plan that is regularly reviewed is imperative.
To illustrate this point, your service or product is the vehicle, and the destination is your business goal. Your business plan is the road that will get you there.
Small businesses that overlook the importance of a business plan will face intense challenges once they begin trading.
Poor management
When a business is in its seed phase, the business owner is often the only senior-level role in the company. Without a strong, capable management team, a business owner is more susceptible to mismanaging different parts of their business.
Part of poor management also includes an inability to take action. Business owners need to find ways to move forward, even if it means taking small steps. One way to do this is to outsource activities you’re not good at or cannot prioritise.
Evasive toward learning
Being complacent is one of the worst things a business owner can be. Running a business involves multiple moving parts, both internally and externally. While mistakes are important, business owners need to learn from them. Putting learning into practice is key to long-term success.
Part of the reason small businesses fail is because owners aren’t willing to do better, learn more, and improve their day-to-day activities.
Inadequate marketing
An effective marketing strategy is crucial for a new small business. Inadequate budgeting, prospect reach, and conversion goals will result in failed marketing campaigns, which can be expensive and detrimental to sales and brand reputation.
While not the sole reason small businesses fail, poor marketing strategies are a significant factor that can negatively impact the success of a business.
How to avoid business failure
The reasons why businesses fail may seem daunting, but there are solutions to avoid business failure:
- Don’t make emotional decisions: when something negative happens, it’s difficult to react strategically. But issues can compound quickly if you respond erratically. While emotions are good, sometimes they can be detrimental in a business context.
- Refine your contingency plan: always plan for a worst-case scenario. Highlight what actions you will take in unexpected situations, and always adapt these to changing market conditions.
- If it’s too late, don’t dwell on it: failure is an inevitable part of life. Some of the biggest leaders in the business world have failed before, but this allowed them to learn from their mistakes and perfect their product or service. The best way to overcome business failure is to learn why it happened in the first place and move on.
Although business failure is an imminent part of life, your approach to it will determine how you recover from it. However, sometimes the stress, heartache and strategising isn't worth it.
If your business is failing, and you can no longer keep your head above water, it is possible to sell a failing business. If you’re at this stage, try not to panic. Read our helpful guide on how to sell a failing business to understand what steps you can take.
There are buyers who are interested in distressed businesses, so if you’re concerned that your business cannot recover, you can advertise your business on our site and find a buyer who will save it.
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