Stressed person at laptop

Why do small businesses fail?

October 1, 2021
Plenty of entrepreneurs start out on their business journeys with great hope and ambition. However, it's a sad fact that one in five small businesses in the UK fails each year. It's enough to strike fear into the heart of any small business owner.Sometimes the reason that a small business fails is outside of anyone's control. Economic downturns, like the financial crisis of 2007 and 2008, are a challenge for any business model. The COVID-19 pandemic has had a massive toll on UK businesses. In March 2020 23,000 more businesses collapsed due to the effects of the virus and  Brexit compared to March 2019. There are also things that are in your control, and we can take steps to address these failures and turn things around.Running a small business is not for the faint-hearted, and there will be plenty of challenges over the years. However, if you understand the most common reasons why small businesses fail, then you can be better prepared and set yourself up for success.By learning from the mistakes of others you can take the next step on the road to being a successful business owner. You can also take lessons from profitable small businesses and mirror them in your own startup to give it the greatest chance for success.

What are the main reasons small businesses fail?

One of the most common reasons that small businesses and startups fail is due to a lack of planning. A successful business needs more than a great idea and a quick chat with the bank manager, it needs a thorough plan. Small businesses can also fail when there is a lack of purpose, or when the "why" behind the business isn't properly communicated. Unsurprisingly, poor leadership is another reason that small businesses fail.No one is born knowing how to run a business. We all learn by taking notes from successful business owners. We can also learn from our own mistakes and the mistakes of others. By having a better understanding of why small businesses fail you can work to shore up your business against failure.Let's take a look in more detail at reasons why a small business might fail, the common mistakes that business owners make and how they can avoid them.

Lack of planning

Remember the 5 Ps of success? Perfect planning prevents poor performance. This is as true in business as anywhere else.If you have no business plan, or a poorly written one, then this is the first step on the road to failure. Business startups are scrappy and move quickly, but this is a step that you can't afford to skip.Research has found that companies with a plan will grow 30% faster than those without one. That said, around one in four SMEs don't have any kind of business plan, despite the fact that you're 2.5 times more likely to get into business if you plan ahead of time.Writing a business plan will help give you a thorough understanding of your market and your customers. It will allow you to crystallise your business idea and it will give any potential investors a helpful and easy to understand pitch. If you have a business plan you will know how much cash your company needs to stay healthy. You will also be able to demonstrate how you differ from competitors. You can also use this plan to set long-term goals for your business, and outline how your business can grow and support itself.The thought of writing a business plan can be overwhelming, but luckily we've made it simple for you. We've created an easy step-by-step process along with a free template for you to create your own stress-free business plan.

Lack of purpose

What is the purpose behind your business? Is it to solve a problem for you, or are you solving a problem for a lot of people, who will be your potential customers? Have you created something that people actually want to buy or something that just pleases you? How does your product intend to meet customer needs? It's OK to follow your passion, but it helps to ask yourself what problem your product or service is trying to solve.There has to be a purpose to your small business beyond making money. Having a clear purpose is not only incredibly motivating for you and your employees, but it will also help you to stand out from the competition. Spend some time defining the "why" behind your business. It should be short, easy for anyone to understand and something you can share with the rest of your team.

Poor management

Let's be honest, no one is born knowing how to lead. It's a skill we learn over time. However, if you want to lead a successful small business then you'll have to learn fast. If you struggle with management decisions, leading and hiring people, or communicating your company vision, then your business is at risk of failure.The best way to improve as a leader is to lean on your experience. However, if you are a new entrepreneur, then you can get plenty of help and guidance from a mentor. You can find business mentors in online business networks, startup forums and industry events. You could even reach out to business leaders you admire and ask them for advice.Another way to be a great leader is to be humble. This may sound odd, given some of the bombastic company leaders we see on magazine covers, but humble leaders make the best leaders. This is because humble leaders listen to other people. They aren't afraid to ask for advice and they aren't afraid to admit to their mistakes and learn from them.You can show your humility as a leader by asking others for their opinions and talking openly about your mistakes. Look at what happened and talk about what you would change, but don't linger on the mistake. Once you have a new action plan in mind, move on.

What's your USP?

Even if you have a great product or service, if you can't demonstrate the USP (unique selling proposition) then it'll be hard to distinguish yourself from your competitors.It's also vital that you have a clear and consistent brand and marketing message to reach your clients. The phrase "if you build it, they will come" doesn't apply to business. You need to get your message out there.Part of this is having an online presence where your customers can reach you. Despite the fact that over 90% of the UK population are internet users 17% of SMEs have no social media or internet presence. An inability to reach your potential customers through their favourite portal could contribute to the failure of your business.By creating a website you can not only further your brand, but you can also use analytical tools to track your website visitors and get to know your client base better, as long as you stick to the GDPR rules. LinkedIn is also a good network to get your business established on if you're looking to sell B2B.

Financial mismanagement

Getting your finances organised when running a small business doesn't begin and end with raising your first seed round of capital. Your business plan should show you how much money your business needs to stay afloat for the next few years and you'll need to work out how much money you need to raise from investors, as well as how many sales your need to make to stay in good financial shape.Your small business may not make a profit for the first few years and you may need to approach private equity or venture capital investors or talk to the bank about getting a small business loan.As a small business owner, it is also up to you to know exactly where every penny goes. Plenty of businesses fail because of financial mismanagement. If you don't pay your taxes on time you could be fined. If you're late paying your bills, you could be chased through the courts, which could damage your reputation. If your clients are late paying their invoices, then this could leave you with a lack of capital, subsequently triggering a cash flow crisis.If you're not an accounting expert, this can all feel a bit overwhelming. If you need help with your invoices, your taxes, or even your payroll, here at Ember we're ready to help.

Growing too fast

Growth is great. It means that customers are biting, you're making money and your small business is taking off. However, growing too fast can attribute to small business failure. If you have more orders or customers that you can handle, then things can go pear-shaped very quickly.You don't want to procrastinate or risk being left behind. However, it's important to plan carefully before expanding and make sure that the growing business can support itself. Make sure that you have enough money to expand, and ensure that your team are ready as well. If your staff need qualifications, make sure you've got training booked for them.If you can't handle more customers than you have right now, it's OK to say no to taking on new customers, rather than risk unsustainable growth.

No disaster plan

It's nice to think that things will always be plain sailing for your small business, but reality will soon come knocking.The pandemic has shown just how quickly things can change, and many businesses weren't prepared for it. As a result, plenty of businesses have gone under in the last year.While you can't predict what will happen in the future, it's sensible to have a plan in place detailing how your business will react in the event of a disaster.In your disaster plan, think about how your business will support itself if sales suddenly dry up, and how you will support yourself. How will your business recover from the disaster, and what do you need to do to protect yourself, your staff and your assets?

No data security

Think back to the last time you lost your phone or were locked out of your computer. It was probably pretty awful since most of our lives are kept online. Now imagine how devastating it would be if you lost all of your company data, from all your passwords to the customer contact list.If you lose all your company data (or it gets stolen) then this would be disastrous for your company. As such you need to have appropriate data security to protect you from hackers or internal mistakes.You also need to consider GDPR (General Data Protection Rules) if you collect any kind of customer data. If you're not compliant then the fines can be astronomical.

Over-reliance on one big customer

If you have a customer who spends a lot and brings in repeat business, then you'll want to take care of them. However, over-reliance on one or two big customers is a mistake. If they disappear, then all your revenue will dry up.If your customer base is small then it's time to start scouting for new ones, and you'll need a contingency plan in place in case they leave.

How to learn from mistakes

No one enjoys making mistakes, but whether the mistake is your own or someone else's, there is always something to learn. The important thing to remember is to never repeat the mistake.The first thing to ask yourself after making a mistake, or reviewing someone else's mistake is to ask yourself "What would I do differently next time?" Doing the same thing and expecting a different result will get you nowhere.If you have employees, it's important to talk about mistakes with them so that you can all learn from each other. Ask them for feedback and get them comfortable talking about failure so that it doesn't get hidden, which will only make things worse.

Match your skills to successful industries

If you want your business to succeed, then it helps to know which industry sectors are growing or on the up. If you're thinking of starting a new business in the UK, then research has found that the professional, scientific and technical sector sees the most success. The same study found that the public administration and defence industries enjoyed the least success for small businesses.Research has also found that computing skills will be most in-demand with the highest number of jobs in the near future. This suggests that small businesses that focus on science and technology have a good chance of success.

Summary

Running a small business takes hard work and determination. There's no guarantee of success, and plenty of UK businesses fail each year. However, there is plenty of room for optimism. With a better understanding of why small businesses might fail, as well as a willingness to learn from mistakes, entrepreneurs can start taking the steps they need to establish a successful company.