Common Reasons Why Small Businesses Fail

Introduction It takes a great deal of hard work to set up and run a successful small business. One in five business start-ups in the UK fail in their first year and around 60% fail within three years.

By understanding the issues that can cause a business to fail, you are more likely to avoid the pitfalls, and this will increase the chances of your business surviving beyond its first year.

This factsheet looks at some common causes of business failure and provides some suggestions on how to avoid them.

Little or no market research Many business owners make the mistake of making or selling a product or service for which there is little or no demand. You will not have all the information you need about potential demand for your product or service if you don't do sufficient market research before you start your business.

Failure to carry out sufficient, detailed market research can result in poor sales and cause your business to fail.

It is vital that you research the following, well before you make the decision to start trading:

Where your customers shop or buy, how often they buy, and how much they spend.
Who your competitors are, who buys from them, and how they are different from you.
The trends and issues in your business sector or industry. Is the market growing or in decline? Are there any external threats to your industry?

You need to be sure that there is a market for your product or service and that there will be sufficient demand for it. This means finding out who else provides the same or a similar product or service and how you can meet customers' needs better than your competitors. Is there sufficient demand in the market for another provider? Are your prices higher than the market can bear?

No clear marketing plan or strategy New businesses frequently fail due to the lack of a clear marketing plan or strategy, especially if insufficient customers are aware of, or prepared to buy, the product or service on offer.

All businesses need sufficient customers and sales to enable them to cover their costs and make a profit, but customers won't come to you unless they know about you, your product or service and what benefits it will give them.

If you do not have a clear marketing plan, you are at risk of making the following mistakes, which will ultimately result in the failure of your business:

Not having enough customers and not knowing how to find any.
Selling your product or service based on its features rather than on its benefits to your customers.
Pricing your product too high or too low.

Insufficient finance and cash flow Too many businesses fail due to lack of start-up and working capital, or because of cash flow problems that emerge a few months into trading. Your business will fail if:

You don't have enough cash or other working capital at the start-up phase.
You don't understand basic finance principles such as break-even, profit and loss, and cash flow.
You don't keep track of invoices, sales receipts, purchase orders, etc.
You don't chase late-paying customers fast enough.

It is important to calculate exactly how much finance you will need to meet all of your start-up costs (stock, equipment and so on) and to cover the costs of running your business until it becomes established. If you can't raise enough finance to cover the costs you have identified, the business will not be viable from the outset.

Business owners who have no business finance skills will not know whether they are making any money or not. It is vital to learn the basics so that you can prepare a simple profit and loss account and cash flow forecast. You should be aware of how much money you have in the bank, what you owe and what is owed to you, more or less on a daily basis.

A good credit control system is vital even for a small business. You need to have a system for ensuring that you send out invoices on a regular basis, and you need to know who hasn't paid on time so you can chase them up.

Ignoring legal issues Starting a business can involve navigating a legal minefield of rules, regulations and red tape. Even experienced business owners can struggle with all the legal requirements of running a business, which can often prove difficult to understand and manage.

Common issues that can result in legal action being taken against you and/or your business include:

Illegally using someone else's intellectual property rights, business name or trademark.
Starting up without licences or permissions that may be required for your type of business.
Starting up without informing the right people or authorities.
Failing to comply with health and safety regulations.

In order to ensure you are trading legally from the start, you should familiarise yourself with legislation relevant to your business, covering key areas such as:

Health and safety.
Planning permission.
Intellectual property.
Data protection.
Trading standards.
Waste disposal.

There are also a number of organisations you must contact and register with before you start trading. If you fail to do so, you risk breaking the law and incurring a penalty or closure for trading illegally.

Problems with people Becoming an employer is a big step for any business owner, and you need to make sure you get it right.

As soon as you take on your first employee, you are committed to complying with employment legislation and you must dedicate sufficient time and resources to make sure that you are able to manage employees effectively.

Staff can be a great asset to your business, but if you do not manage them properly they can be a drain on your time and energy.

Common mistakes you must avoid include:

Not coaching, training or explaining to your staff exactly what is required of them.
Not paying your staff on time, or not paying the right amount.
Not providing new staff with their written terms and particulars of employment. This is required by law.

Not insuring against risks You need all the relevant insurance to be in place as soon as your business is up and running. Some insurance policies are essential, while others are optional. It is important to understand the risks to your business and make sure you insure against them, for example:

Staff, customers or members of the public getting injured.
Business interruption, for example following a fire, flood or theft.
Claims of professional negligence or misconduct.
Accidental damage to premises, equipment and stock.
Legal disputes with customers, suppliers and other third parties.

Poor planning Whether you are a new or established business, you should have a constantly evolving business plan to help you define your current objectives and your strategies for achieving them.

If you do not stay focused on the objectives in your plan, you will quickly find that you are starting to lose control of your business.

Common mistakes include:

Not preparing a business plan.
Spending too long preparing your business plan.
Failing to communicate your ideas, plans or business proposals to partners or funders.

Your own limitations Your business needs an investment of your time and energy to make it a success and it is up to you to make sure it does not fail.

There are personal issues that can cause a business to fail, and it is important to understand your own strengths, weaknesses and motivation for starting a business. There are also some basic reasons why you may be ineffective, which in turn can lead to your business failing. These are:

Failing to learn lessons from your business mistakes.
Putting off or avoiding completing tasks you do not enjoy doing.
Refusing to change your mind, or changing your mind too often.
Going into business believing that you will get rich quickly.

Lack of skills and training In addition to any formal qualifications that may be required to operate in some business sectors, anyone planning to start a new business will benefit from training in general business skills, such as:

Marketing.
Finance.
Customer service.
Managing staff.
Compliance with business-related legislation.

Advice and support Businesses that seek advice and support, particularly during their start-up phase and their first few months of trading, are far more likely to survive and prosper.

The advice and guidance of an experienced business adviser, coach or mentor can prove crucial. Good business advisers can also act as a sounding board for your ideas, and help you spot potential problems and pitfalls.

Key sources of business advice and support include:

Your Local Enterprise Agency, which may provide you with free or low-cost support from an accredited business start-up adviser.
Your local Chamber of Commerce, which can provide a range of business support and mentoring as well as opportunities to network with other small business owners.
The business reference section of your local library. Some libraries employ accredited business advisers.
Trade or professional associations for your sector or industry.
Your accountant or bookkeeper, who can help you understand the basic finance principles involved in running a business.
Your bank. Most banks provide a package of support for their business customers.

Contact Ashored for support with your business