What Causes Small Businesses to Fail?

The 11 rules of life….

Every so often the 11 Rules of Life, supposedly delivered by Bill Gates at a speech to college graduates, does the rounds on the internet.

It popped up again recently on a channel I follow and it reminded me that failure is an important part of life – and business.

Rule eight strikes me as particularly pertinent: “Your school may have done away with winners and losers but life has not”.

In life, failure is as important – if not more important – as success. That said, it’s often a lot more painful and can bring secondary consequences.

But what failure teaches us is often invaluable. Nobody has the time to make every possible mistake themselves, which is why sharing the lessons from failure is so beneficial.

Here, we share some of the key reasons why small businesses fail, so hopefully you can profit from others’ lessons and make a success of your own business.

Starting out in business for the wrong reasons

Time and again with big decisions, starting out for the wrong reasons can lead to ultimate business failure, whether that’s in six months’ time or five years’ time.

Starting your own business for self-centred reasons (more time with your family, big profits, not having to answer to anyone else etc.) isn’t really what’s going to drive you to success.

Some good reasons for starting your business could be that you have a great idea that you know – from research – others will love and/or need and you have the passion and determination to make it happen.

Or that you have the right skills to make tough decisions, deliver solutions and build a solid customer base of people who believe in your product as much as you do.

Lack of planning

We’ve extolled the virtues of a good business plan before and with good reason.

A watertight business plan based on careful research is key to helping you secure investment and achieve your goals.

Remember to be realistic, or even to err on the conservative side in some areas when making your plan.

Detail the findings of your market and competitor research; identify potential obstacles to overcome, forecast your first couple of years’ figures and outline funding and workforce requirements.

Insufficient working capital

In business, there’s no room for money to be a dirty word. You need it to get things up and running in the first place and you need it to ensure you can pay your staff and overheads on an on-going basis.

To have a fair chance at success,it’s vital to determine how much money your business will require.

Be aware that it can often take a year or two to get things off the groundand that you will need enough money to support your company until sales start to cover costs.

Don’t overestimate the revenue that will be brought in from sales and the fact that someone has to make those sales in the first place. If that’s not your strength, you’ll need to hire someone for whom it is.

And bear in mind that customers don’t always settle their invoices on time, so you’ll need enough in reserve to pay your own bills on time before money owed to you comes in.

Underestimating the work required

It’s one thing to be a great employee and excel at your job. It’s quite another to run a successful business.

Being good at the tasks you were good at as an employee simply isn’t enough – and is one of the big reasons why small businesses fail.

You need to be able to learn and adapt. You need to understand when to outsource tasks and when to do them yourself.

Marketing and accounting are prime examples here – if you’re going to tackle either of these tasks yourself while you get operations up and running, you will need the know-how, which requires a lot of learning.

Otherwise, you will need to have sufficient funding in place to be able to outsource these tasks to experts.

Too much too soon

During the heady days of early success, it can be easy to assume that expansion is wise when actually, it isn’t. Slow and steady growth is the key to long-term success as many small and indeed larger organisations can attest.

In fact, one of the single biggest reasons for business failure is expanding too quickly.

Before you look to expand, a solid customer base and reliable cashflow needs to be established.

On the other hand if the business really is struggling to keep up with the demands of production or you find you can’t fulfil sales requests in a timely manner, the chances are it is time to grow.

Before taking the plunge though, identify which resources and processes you need to improve so you can expand in the right way.

Not being prepared for the rough

Being successful in business is about being prepared for all eventualities and while staying afloat when things are running smoothly is one thing, being covered when hard times hit is quite another.

One thing you absolutely cannot afford to overlook is arranging comprehensive, reliable insurance cover. If you’re not covered and someone takes legal action, it could be the death knell for your company and nobody wants that.

But small business failure can just as easily result from more mundane, everyday issues like key staff being off sick or because an important customer withdraws from their contract. Prepare in advance for these eventualities so that you don’t have to shut down as soon as you hit the first bump in the road.

Lack of appropriate marketing

Failing to promote your brand and products effectively will have a huge impact on your sales.

If no-one has heard of you and your products aren’t visible in this hugely competitive market, you’re not going to bring in much revenue.

Most business owners however, assume that having a website and a social media page is enough. This is misguided – the tools and channels you use to market your company should be based on your target market.

How do they like to be communicated to? If they’re of an age where the internet and social media are rocket science to them then your website and Facebook page won’t do you many favours. If they’re young adults with disposable income, an advert in the local newspaper could similarly prove to be a waste of money.

Before committing to a marketing channel, research your audience and their communication preferences to ensure you reach them effectively.

Outsource your accounting

If you’re running a small business and need some help with the financial side, why not outsource the accounting tasks? At THP, we’re experienced in helping a wide range of businesses with their accountancy – contact us today for assistance, at one of our offices in CheamChelmsfordWansteadSaffron Walden and London City.

Join The Conversation
ICAEW
Member of the Legal Services Guild
Sign up for our Newsletter