Why do businesses fail?

  1. Business owner feeling the strain
    Ray Newman

    Ray Newman Contributor

    147 31
    11 |

    Britain has been in something of an entrepreneurial frenzy in the past couple of decades, but the number of people starting new businesses is slowing down, and the rate of failure is increasing.

    The Government monitors these numbers closely, as you might imagine, producing a regular report drawing on a data set with the rather melodramatic title Business births, deaths and survival rates.

    The most recent report, published in late 2018, tells us that for the first time since 2010, the number of new businesses has decreased, from 414,000 to 382,000 between 2016 and 2017, while 357,000 ‘died’ between 2016 and 2017 – up from 10.2% in 2016 to 12.2%.

    So, the big question: what can you do to prevent your business failing?

    The first step, if it’s not too late, is to avoid starting a business with no hope of survival in the first place.

    One of the most common types of thread on the UK Business Forums is the ‘What do you think of my idea?’ query.

    Often, though, these threads reveal an underlying problem: people want reassurance, not to have their dreams shot down. They’ve already made up their minds.

    You need to challenge yourself – even while hoping for the best, you’ve got to play out the worst-case scenarios. What if sales are 20% lower than you expect? What if you suddenly need to replace a vital bit of kit, or withdraw a batch of product, or your premises is flooded? Writing a business plan is one way to force self-interrogation.

    When it comes to testing your idea with others, resist the instinct to be defensive. In most cases, people aren’t trying to be mean, even if it feels as if they’re telling you your beautiful baby is, in fact, downright ugly.

    That doesn’t mean you should take every criticism or question to heart, either. There’s a balance to be struck between rigorous challenge and excessive caution.

    What separates the entrepreneur from Joe Public is the instinct that kicks in and says: “OK, fine. I’ve assessed the risks, but I’m going to make the leap anyway”.

    Stay on top of cashflow

    Ignoring cashflow problems, or failing to take them seriously, can be fatal for a small business: research undertaken by software firm Xero suggests that each year 50,000 UK businesses cite poor cashflow as the primary reason for their failure.

    By the time the danger signs become apparent – you’re always overdrawn, you can’t pay your bills – it might be too late.

    The answer is obvious: make time for forecasting, planning and budgeting, and react quickly when it becomes clear there is an issue. If that issue is structural – a fundamental problem with your business model, or your way of doing business – then something needs to change.

    One common problem is a lack of rigour in tackling late payments. The Federation of Small Business (FSB) estimates that on average UK firms are owed £6,142, often by much larger companies whose payment terms are outrageously one-sided. It calls this practice ‘supply-chain bullying’.

    If you can – easier said than done in many cases – make sure your payment terms are clear, and that you’re making it as easy as possible for people to pay. (A mean corporate finance team will find any opportunity it can to bounce a scrappy invoice back.)

    Carrying too much weight

    The bootstrapping mentality can be an asset. At the same time, it can also lead business owners to carry too much on their own shoulders for too long.

    Up to a certain point, keeping your workforce lean and spending minimal amounts on outsourced services is highly efficient. Thereafter, it will do more damage than good.

    It can leave your skill stretched too thin, affect customer perceptions of the quality of your product or service, and make it difficult to run the business in a measured, structured way.

    And, of course, it can simply lead to burnout – to a perfectly good, viable business folding because the person driving it has effectively run out of fuel.

    Don’t beat yourself up

    Some businesses fail – it’s a fact of life. Equally, though, businesses that are never launched can never succeed.

    There’s a tendency to focus on the habits of successful entrepreneurs: ‘This genius only eats breakfast every other day and works standing up – is that the secret?’ What we tend not to hear are the tales of people who did all the same things but failed because the stars simply weren’t aligned.

    There are also plenty of stories of failures that, against the odds, ‘unfailed’.

    In 1997, so the story goes, Apple was ‘90 days from going broke’. YouTube, now owned by Google, began life in 2005 as an undersubscribed dating site before its founders realised the video streaming software was its real asset. Henry Ford’s first two car companies both went bust but, as they say, third time lucky.

  2. Mark T Jones

    Mark T Jones Contributor

    6,350 2,703
    Many of today's businesses are set up to fail (or put another way, they aren't really businesses, just a bit of money until reality strikes)

    Among the more 'serious' businesses, there is still a strong tendency to focus on doing the job rather than running the business (working in the business rather than on it).

    Failure in itself isn't such a bad thing - not learning the lessons is!
    Posted: Apr 17, 2019 By: Mark T Jones Member since: Nov 4, 2015
    Clinton and Aleksander_Gramm like this.
  3. Mr D

    Mr D Contributor

    28,532 3,537
    Starting off with the intention of doing the job (you being the cheapest possible person who knows what they are doing) until can grow enough to get someone else doing it can work.
    Most of us start small. Having the ability to grow then once grown, having the ability to manage, then later oversee...

    Some are quite happy doing the work and do not want to do management. Perhaps they refuse to grow the business or grow it and dump most management stuff onto a manager.

    Some can move on to management but still a key individual in the business. Remove them from the business and it can falter.

    And hopefully some can move on to being part of a board of directors setting policy and strategic planning while their workforce and management do the running of the business. They have something requiring time away from work the business operates just fine without their hand at the wheel.

    Long way to get there. Not necessarily what all business owners want even.
    Posted: Apr 17, 2019 By: Mr D Member since: Feb 12, 2017
    Paul FilmMaker likes this.
  4. GTL

    GTL Contributor

    182 31
    I've been at all ends of the spectrum.

    Picking the right colleagues is critical. I had a business (for which I raised millions) but picked my board very badly indeed. They are not there to help 'you'; they are there to help the business.

    And in the case of my board in this particular instance, the Chairman was there to help himself.
    Posted: Apr 17, 2019 By: GTL Member since: Sep 18, 2017
    Paul FilmMaker likes this.
  5. Millerd

    Millerd UKBF Newcomer

    40 9
    Fascinating article about a really serious problem not only in the UK but all around the world.

    This appears to be a major problem in that many businesses are started with a supply-side focus "the product is great there must be customers out there ... somewhere!". Too little market research is done and there is no clarity on who the customers are and what they really want. The product or service is undifferentiated and doomed from the outset.

    Many owners stay doing what they are comfortable with for too long. They are often experts in one aspect of the business and ignore the other less comfortable elements. There may also be a degree of arrogance in believing that owning a business makes you a businessman and they do not discover and acknowledge what they don't know.

    Their expertise can also make it very difficult to delegate tasks. One solution here is to build systems.

    Too many have too many balls in the air. They are unable to focus on the priorities as everything is a priority. Short cycle planning is far more effective than getting lost in day to day or the future ... set a few (3 or less) priorities, have clearly defined goals and make it happen. For this to be effective it probably needs some kind of accountability partner.

    Many businessmen have no understanding that there are critical steps in building a business like getting to a breakeven before tackling growth. They don't understand the business dynamics of cash flow - for too many it is feast or famine ... both of which states leading irrational behaviour.

    You can add Fedex to your examples of "nearly going broke" ... saved with blackjack winnings!
    Posted: Apr 21, 2019 By: Millerd Member since: Feb 24, 2019
  6. Ian J

    Ian J Factoring Specialist Verified Business ✔️
    Full Member

    6,783 2,374
    There was a radio program thirty odd years ago about small business failure and they concluded that there were only three reasons why businesses failed - bad management, bad management and bad management and I have seen nothing since then to make me think that they were wrong
    Posted: Apr 26, 2019 By: Ian J Member since: Nov 6, 2004
    consultant and The Byre like this.
  7. John Hemming

    John Hemming Full Member

    862 189
    The problem with "bad management" as a reason is you need to identify what errors the management have made. Very often people are too optimistic as to their income and also not sufficiently pessimistic as to expenditure. My experience of over 30 years in business is that opportunities crop up and you need to have the flexibility to change strategy.
    Posted: May 26, 2019 By: John Hemming Member since: May 23, 2019
  8. Jyotirmay Samanta

    Jyotirmay Samanta UKBF Newcomer

    0 2
    Lack of planning is the first and foremost reason why businesses fail. Said that, planning means both short term and long term planning. Your plan should include where you want to see your business over the next few months all the way to the next few years.
    Posted: May 27, 2019 By: Jyotirmay Samanta Member since: May 27, 2019
  9. Benjamin Tolmer

    Benjamin Tolmer UKBF Newcomer

    3 0
    There is numerous reason for business failure. they are as follows:-
    • Lack of Strategic Planning and Implementation,
    • Leadership failure,
    • Ignoring and neglecting customer needs,
    • Poor and inconsistent Management,
    • Lack of Focus on Goal benchmarks,
    • Improper and traditional Marketing Strategies.
    Last edited: May 31, 2019
    Posted: May 31, 2019 By: Benjamin Tolmer Member since: Mar 26, 2019