The top 10 reasons small businesses fail – and how to avoid them

Starting and running a small business can be difficult, which is why it is essential that small business owners know why businesses often fail. From not having the right foundation in place to rushing into decisions too quickly, there are several common mistakes that can lead to the demise of a small business.

One of the biggest factors impacting failure is inadequate cash flow management. Without careful tracking and planning, businesses tend to lose their profitability due to lack of funding and overextending their budgets. Additionally, another contributing factor is the lack of a well thought-out strategy.

Not having proper market research or failing to correctly identify customers’ needs will lead to failing sales which can no longer sustain a small business over time. Taking the time to understand the challenges behind running a successful business will help entrepreneurs better prepare for these issues before it’s too late.

What’s even sadder, is that many business insolvencies might have been prevented.

Why do businesses fail

Businesses fail for a variety of reasons, but some of the most common include poor management, lack of capital, insufficient market research, poor product or service design, over-expansion, and a lack of competitiveness in the marketplace. In some cases, businesses may also fail due to external factors such as economic downturns, changes in consumer behavior, and disruptive technological advancements.

It is important for business owners to understand their industry and their customers, to make informed decisions, and to be prepared for the ups and downs of the business cycle. By properly managing resources, staying innovative, and adapting to change, businesses can increase their chances of success and avoid the pitfalls that lead to failure and avoid the risks of overtrading.

Businesses fail for a huge variety of reasons, but these are our top 10:

Common Causes of Business Failure

Despite the best efforts of entrepreneurs to save a struggling business sometimes they fail. When a business shuts its doors, it can have ripple effects on the local economy and the lives of employees and their families. While there is no surefire way to guarantee success, understanding some of the common causes of business failure can help increase the chances of success. One frequent cause of business failure is inadequate planning.

A well-thought-out business plan is essential for any new venture, and it should include market research, a SWOT analysis, financial projections, and more. Another common cause of failure is running out of cash. Many businesses struggle to keep up with expenses in the early stages and run into trouble when they are unable to generate enough revenue to cover their costs. Poor management is another frequently cited reason for business failure.

From hiring the wrong people to making poor decisions, bad management can quickly doom a company. Finally, many businesses fail due to an inability to adapt to changing market conditions. In today’s rapidly evolving world, businesses must be flexible and able to change course quickly to stay ahead of the competition. By understanding some of the most common causes of business failure, entrepreneurs can put themselves in a stronger position for success.

1. Not understanding what it’s all about

Running your own business is tough and lonely.  People start up businesses for a host of reasons; they want to make some money on the side, they’re fed up with their job, they see the boss’s big house and flash car and fancy a slice of the action, or because they’ve always wanted to open a cupcake shop or run a pub. 

But a great carpenter may not be great at running a carpentry business; a superb cook may not be the best restaurateur.  It’s essential to remember that running a business is about making money, not demonstrating how great you are at your particular art.  You need to understand the multiple aspects of running a business, from finance, to HR, to marketing, to health and safety, to strategic planning, etc, etc.  And it’s darned hard work – forget about work/life balance; forget about 9 to 5.

2. Lack of a business plan

It may be a cliché that’s as old as time, but it’s true that if you fail to plan then you plan to fail.  It’s vital to have a proper plan setting out short and long term goals, how they’re going to be achieved, and how they’ll be financed along the way. 

The plan needs to identify any potential pitfalls or hiccups along the way, and the financial component should factor in things like how seasonal fluctuations in business will be dealt with.  Getting everything down on paper massively reduces the risk of business insolvency.

3. Lack of cash control

Another cliché, but another vital business mantra – cash is king.  When times are tough, sales are more difficult, debtors take longer to pay, and banks are more reluctant to lend.  In other words, cash is harder to come by.  So, make sure that you know what your cash requirements are likely to be both in the short and longer terms (see above). 

Try to negotiate terms with your suppliers that are as long as possible, and terms with your customers that are as short as possible, remembering that a sale’s not much use to you until the cash is in your bank account.  Consider the impact on your cash flow of that big, juicy contract that you’ve been chasing.  And before any major spending decision, ask “why?” at least three times.  Most importantly manage your cash position relentlessly – preferably daily.

4. Failure to monitor

Decisions should always be made on the basis of up to date information.  So did you make a profit last month?  “I’m sure we’re making a profit” is a statement that needs to be backed up something of substance. 

At the risk of repeating ourselves, cash flow should be monitored rigorously, preferably daily.  Working capital should be checked at least weekly, including an aged analysis of debtors and creditors.  Profitability needs to be looked at monthly

5.  Overtrading

Growth is great, but not if it exceeds your resources and capacity to deal with it.  The dangers of overtrading arises when a business accepts work but finds that it doesn’t have the working capital or people to complete it.  Typically wages and rent needs to be paid, additional equipment may need to be bought and suppliers are expecting payment before cash is collected from sales, this is what happened at Jamies Italian. 

So although you think you’re doing stunningly well, and your accounts show that the business is making a healthy profit, you don’t enough cash to pay the bills. In the present climate, borrowing from the bank may be challenging, particularly if the business has struggled over the last few years, and now doesn’t look sound enough to justify additional lending from the bank’s point of view.  The end result could well be company insolvency.

6. Failing to hire and retain the right people 

Failing to hire and retain the right people can be one of the biggest business failures a company can make. Without talented, reliable staff members, day-to-day business operations can suffer dramatically. It is essential for employers to assess their business needs and ensure suitable candidates have the skills and qualifications they require. Additionally, they should offer adequate support to employees by setting reasonable deadlines and providing incentives that reward hard work. By ensuring that the right people are hired and retained business owners will benefit in spades as their business becomes more productive and successful well into the future.

7. Failing to adapt  

With the business world becoming more competitive and the modern consumer trend changing faster than ever before, business failure due to lack of adaptability is a risk business owners should take seriously. Not adapting to changes in technology and consumer behavior can lead to a business failing to keep up with its competitors, resulting in losses that could have been avoided. Business owners need to be aware of any changes in their specific industry and be willing to make necessary adjustments in order to stay profitable and competitive. By being proactive rather than reactive when it comes to business challenges, business owners will be able to better anticipate potential issues and put strategic plans in place for long-term success.

8. Not keeping abreast of customer needs or the competition 

Not keeping up with customer needs or staying aware of what the competition is doing can spell business failure for any business. Keeping track of customer feedback and understanding the needs of the market is a key way to stay ahead in business, as well as responding quickly to changes that the competition might make. To ensure success, businesses should dedicate resources to understanding the customer experience, while proactively researching competitors’ business strategies and product offerings. By identifying gaps in trends and analysing data points across multiple sources, customers can be kept satisfied and business operations can remain competitive.

Read more: What is Business Simplification and Corporate Streamlining?

9. Poor marketing

Poor marketing can be the cause of business failure. It is a mistake too many business owners make when launching and sustaining their business. Poor marketing can lead to a lack of brand awareness, low sales, ineffective customer service, and even decreased profit. With potential customers going elsewhere due to a business’s poor marketing strategy, business owners can quickly find themselves suffering from decreased public trust and loyalty. The importance of good marketing strategies should never be underestimated or disregarded if businesses want to remain successful in an ever-changing economy.

10. Not asking for support 

At times business owners are hesitant to reach out for help because they fear rejection, or worse yet – business failure. However, avoiding asking for assistance could be the downfall of a business. Entrepreneurs should consider reaching out to their peers, colleagues or even potential business partners to discuss business challenges and get the support they need to bond and grow. Furthermore, having an external point of view can help business owners understand potential risks and successes that may elude them otherwise. Therefore, entrepreneurs should not hesitate in asking for guidance when needed; instead they should use it to their advantage!

Read more: Tips on avoiding business failure

Conclusion

There are many other reasons for businesses failing. Do you agree with our top 10?  We’d love to hear whether you agree, or whether you’d suggest a different top 5. Meanwhile, if your business, or your client’s business, is struggling please get in touch. Our experienced corporate recovery team will be able to help.