Why do so many businesses fail

[kzandco]

Why do so many start ups fail in their first year and what can be done to prevent this from happening?

 

[Joe E]

Really don't think there is one size fits all answer, potentially lots of reasons to varing degrees and combinations.

Personally off the top of my head:-

Lack of a proper investment/business plan from the outset knowing all the the costings and potential revenues.

Lack of a marketing plan and allocating sufficient money to implement it.

Lack of a strategy to tackle the market place.

Lack of skillset in sales, marketing, accounting etc.

Failure to recognise the above and outsource appropiately.

Inability to review and/or amend if and when appropiate business plan/model/strategy.

Lack of Motivation to just get things done.

Lack of delegation which can lead to low morale of staff/self/other relevant parties involved.

Poor Credit Control/Debt Recovery processes/procedures

Just a few things I can think of I'm sure there is more, just like to add all the above I mean in a non-judgemental way, being human we all make mistakes

 

[Richie N]

Also lack of experience and knowledge in the business that they are involved in.
Cash flow is usually a big issue.

 

[Urban Publications]

PPPPPPP

Do I need to say anymore

 

[I Love Spreadsheets]

I think all of the above reasons are true and most of those are caused by the education system.

The purpose of a school is to produce useful members of society through education, yet kids leaving school think their only options are getting a job, going on the dole or going in to further education.

Sure there are business studies in schools but this is generally only available to the academically bright and is far from the main core education system.

Now consider out of the 30,000,000 working in the UK 4,000,000 are self-employed - i.e. Nearly 15% of the population is self-employed.

The vast majority of those would have had no business education at all, they have had to go out and learn as they go.

If the education system included in its core curriculum the basics of how to run a business then I think we would see far less failures. People will know what to expect, they will be aware that marketing takes as 5 times much effort as they think etc

 

[businessfunding]

I woul agree that a lot boils own to lack of knowledge of the wier issiues associated with running a business, or put another way - 'I'm good at what I do and that is all I need'.

Even senior executives startiing their own business face some nasty shocks. It woul be nice to think that education could address this but itreally is a vast topic.

 

[Urban Publications]

Another issue is people seeing a good idea and running with it without any prior knowledge to that business...this creates guesstimates not estimates in their business plan

A good example is the chap who just won Apprentice...starting a business up he is skilled and experienced in...not going to start a tangent business he knows nothing about...and to top it off had a very tight BP...who budgets for year3 Christmas party

Another problem is shows like mentioned the Apprentice, Dragons Den etc etc, people see ideas and think "I can do that"...when really they haven't got a clue

Apprentice is terrible for it, for example going out buying tat from a wholesaler and selling it on...Alan Sugar says "Six of you made £400 profit well done"...no mention of the cost of the pitch in the westfield centre, Insurances, Taxes and then the six peoples wages...when you work it all out properly that £400 profit is nowhere near enough.

Someone mentioned schools and to be honest the big cogs are turning, quite a few schools are now turning into Academy's and it is helping, my lad goes to an Academy and they are teaching everyday life after school including business skills, not ridiculous crap about Vikings or py that very very few will use when leaving.

 

[Retired_Accountant]

Probably the two biggest causes of 1st year failure are -


1) It was a bad idea to start with. People start businesses with totally unrealistic ideas and only get professional advice ASFTER its to late.

2) They underestimate or ignore established competition.

 

[kulture]

I believe it is normally lack of cash flow. People underestimate how important cash flow is.

After that it is poor costing. All too often people buy at x and sell at x+1 and forget post, packaging, wages, wastage, "lost" deliveries, etc etc. They look at the turnover and see that they are making lots of sales and miss the bottom line.

 

[Homshaw]

Marketing
Lots of people are good at what they do but don't understand the importance of marketing. For a new business you need customers. When word of mouth kicks in you are made until then it's tough. You need marketing that works and is cost and time effective

Cost Control
Some people have no idea of cost control. I see people pay thousands for websites, newspaper adverts, marketing plans that result in little business

Lack of experience.
There are businesses who know new businesses are easy targets and they do target them. Newspapers, on-line directories, radio stations, networking organisations. You need to test to see if things work before you commit

Naivity
People buying a business don't seem to take account of the fact that people lie. The number of times turnover turns out to be half that promised is alarming

People always think they know more than existing business people. 99 times out of 100 they don't. Other people aren't daft. Don't underestimate them


Too friendly not businesslike
Some people seem afraid to charge.

Lack of hard work

Having your own business is hard work. After a hard day you need to clean the toilet, wash the windows, get the books up to date. Might change when things pick up but until then get used to it

Your first business should be little investment with little downside risk. If that works and you have the experience then take an informed risk. If you have a good job think twice before you pack it in. It's not as easy as you think.

 

[Philip Hoyle]

I'd add arrogance to the list rather than simple naivity.

It's far too common for business owners to take professional advice AFTER they've made decisions or got into difficulties. Then those same people whinge about how unhelpful or costly was their solicitor/accountant or whoever.

The classic common one is where someone signs a lease for a shop or office, or worse, a pub, and only after signing it do they make appointments to see the accountant and solicitor. Same when someone buys a business and then goes to see an accountant after several months. What's the point? The deed is done. Then it's just a matter of damage limitation and it nearly always costs more with a poorer outcome when you have to try to salvage a bad situation to make the best of a bad job.

I think too many people have an over-inflated opinion of their own abilities, experience and knowledge and simply can't understand why they need to take professional advice, that is until they find themselves in the mire!

 

[Retired_Accountant]

The classic common one is where someone signs a lease for a shop or office, or worse, a pub, and only after signing it do they make appointments to see the accountant and solicitor.

A perfect example of that combined with an equally daft bank manager came my way a while back.

Client took out a 5 year lease on town centre premises. The owners did not renew the lease after the 5 years were up, effectively putting the client out of business, BUT, the client had taken out a business loan with the bank over 10 years, leaving the client with no business and 5 years repayments to make.

In my view the bank was negligent in giving a 10 year loan to a business which it knew only had a 5 year lease, and after an exchange of views the bank agreed to waive interest charges on the 5 remaining years payments.

Professional advice at the outset would have stopped that situation arising.

 

[Wasworkinallweek]

I am watching a guy who has just started in a shop similar to one i had last year ,he is selling stuff too cheap
he is proud to be selling screws at less than screwfix
he is selling an iten he buys for 9 pence at 39 pence great % mark up may be but we sold them for £3.25 and paid 7pence .
i tried to explain that the market price is that but he seems to think cheap will bring in loads of customers (i think the term is busy fool )
and to echo a previous poster he has no product knowledge (and wont listen)
he has a very tied up 5 year lease and he is allready saying after 3 months 'how do people in shops make any money ?'

 

[Talay]

..... they will be aware that marketing takes as 5 times much effort as they think etc

At university one year, they included a marketing piece in the weekly timetable. So often the lecture was a speaker of some sorts that we used to send someone out from the bar to check whether it was a speaker that week or not. If it was, we stayed in the bar. If it was a real lecture, we would probably stay in the bar.

Yet decades later, I find myself referring back to some of the marketing lectures I did go to and the concepts learned, far more than some of the core subject skills.

It wasn't a difficult concept to understand but we didn't give it the respect it deserved back then and I try to make sure I don't make that mistake in my business today.

 

[Homshaw]

Marketing is key but it is difficult because

• no two businesses are the same and what works for one will not work for another
• it can be expensive and yet not produce results
• when you are new to business and still a little unsure is the time you need to promote yourself. By the time you are confident at marketing Word of Mouth and repeat customers kick in and you don't need to market to the same extent

A business plan is important and in the early stages you need to sit down and think about what you are doing for 2 or 3 hours every month. It doesn't have to be typed up with graphs etc (unless it is going to third parties) but you need to go through major headings like marketing, cash flow, target customers etc and revise your strategy in the light of experience

Worst mistakes I made were

• undercharging to get work
• agreeing to marketing that did not work in particular a networking group that took not only money but time

I'm fine now. Looking back would I do it again. No it was tough.

 

[Homshaw]

I am watching a guy who has just started in a shop similar to one i had last year ,he is selling stuff too cheap
he is proud to be selling screws at less than screwfix
he is selling an iten he buys for 9 pence at 39 pence great % mark up may be but we sold them for £3.25 and paid 7pence .
i tried to explain that the market price is that but he seems to think cheap will bring in loads of customers (i think the term is busy fool )
and to echo a previous poster he has no product knowledge (and wont listen)
he has a very tied up 5 year lease and he is allready saying after 3 months 'how do people in shops make any money ?'

Yes people don't understand you might have a massive markup but if your rent and rates are £10 to 15K a year they need to be

A new business with a 5 year high cost commitment is high risk and could be life ruining if it goes wrong

 

[GeorgeM]

"Why do so many start ups fail in their first year" ?

Because many new startups treat their business as simply a job, whether it be e.g a cleaner, electrician, plumber, web designer or others. They focus mainly on the technical elements of the product or service they provide, but don't fully consider all the other essential activities: research, marketing, sales, finance, etc.

These latters ones are just as important as the core product, and if not done properly will result in either a failed business or one that massively underpeforms.

A business is not a job, even if you are purely a self-employed one person operation.

 

[raineshoe]

I believe it is normally lack of cash flow. People underestimate how important cash flow is.

After that it is poor costing. All too often people buy at x and sell at x+1 and forget post, packaging, wages, wastage, "lost" deliveries, etc etc. They look at the turnover and see that they are making lots of sales and miss the bottom line.

Woudl definitely agree with that one. See that a lot in our line of business.

 

[raineshoe]

Also, should add went on a business course where a colleague attended. This colleague reckoned on £10.00 an hour being good for his self employed service, but couldn't see when I and the lecturer both pointed out that it wasn't £10.00 an hour once you took out your expenses. No amount of explaining could make him understand that.

 

[90DC]

Also, should add went on a business course where a colleague attended. This colleague reckoned on £10.00 an hour being good for his self employed service, but couldn't see when I and the lecturer both pointed out that it wasn't £10.00 an hour once you took out your expenses. No amount of explaining could make him understand that.

Yeah, £10 an hour could become £5 an hour once you factor in insurance, equipment, NI, tax and other overheads. Silly man.

 

[ThePublisher]

I see too many start ups where people expect to be able to make a liveable living from the moment they start with little or no investment.

'I need to make some money, I'll start a business', not 'I want to start a business, I'll need to make some money'.

 

[Deleted member 127702]

If the education system included in its core curriculum the basics of how to run a business then I think we would see far less failures. People will know what to expect, they will be aware that marketing takes as 5 times much effort as they think etc

And who would be teaching this? Almost by definition NOT people who have been successful running businesses!

 

[Deleted member 59730]

In my limited experience businesses fail and I end up with a bad debt for a limited number of reasons.

1/ They are crooks.

2/ The BMW factor. They buy into a lifestyle on credit before the business can afford it.

3/ They get scammed and learn from the experience and start scamming their suppliers.

 

[RedEvo]

And who would be teaching this? Almost by definition NOT people who have been successful running businesses!

I'm not sure you need to have run a successful business to deliver a curriculum created by people who have. The important thing would be the development of the teaching materials IMHO.

d

 

[Oakley7]

It was a bad idea to start with. People start businesses with totally unrealistic ideas

+1

The retail sector is riff in this area with individuals who have totally unrealistic expectation of potential sales.

So often do I see shops opening up that don't have a chance of reaching the required turnover neccessary to pay expenses (rent, rates, staff and so forth) let alone make any money.

 

[Blood Lust]

Why do so many start ups fail in their first year and what can be done to prevent this from happening?

Top three reasons -
1. The owner(s) dont know how to run a business.
2. There is little demand for their product or service.
3. They run out of money because they waste it all on advertising.

1 - Running a business
To begin with you need to gain a good understanding of how a business should be run. I advise getting some business management qualifications that equip you with a wide range of skills. This will increase the chances of your business surviving its first few years.

2- Demand
People will only buy if they need your product (or service) and if they think the price is acceptable.

3 - Advertising
Customers need to know you exist but advertising isnt that effective for generating sales when starting out. Cold calling and a decent website will generate you far more business.

If you want a website I'd do it yourself. PC World sells website design software for under £50 which is drag and drop. They come with photos, artwork and free web hosting for 12 months. Prices are cheap after that and you can buy your own domain name for under £5. Its a lot cheaper than paying another business £2000 to create your website and looks just the same.

 

[Homshaw]

+1

The retail sector is riff in this area with individuals who have totally unrealistic expectation of potential sales.

So often do I see shops opening up that don't have a chance of reaching the required turnover neccessary to pay expenses (rent, rates, staff and so forth) let alone make any money.

Yes and there is a constant supply of people ready to take over the empty shop thinking they know better.

 

[Blood Lust]

Lack of a strategy to tackle the market place.
Inability to review and/or amend if and when appropiate business plan/model/strategy.

Lack of delegation which can lead to low morale of staff/self/other relevant parties involved.

Poor Credit Control/Debt Recovery processes/procedures

Business management qualifications will give him strategic management skills and the tools needed to evaluate the way forward.

They will also teach him that leadership isnt about bullying staff, being aggressive or trying to make them perform. Its about treating them correctly and taking care of their recognition, status, development and social needs.

Cash flow problems can arise from poor credit control so thats valid too.

 

[Blood Lust]

Marketing
Naivity
People buying a business don't seem to take account of the fact that people lie. The number of times turnover turns out to be half that promised is alarming

Too friendly not businesslike
Some people seem afraid to charge.

If someone has no accounting knowledge its important to have an accountant look over the books before buying a business. The accountant will then decide if the business is worth the money.

Be friendly and professional towards your staff but see external competition as being like swimming with sharks. Many businesses operate sharp business practice and will go in for the kill if an oppourtuity to make money arises even if it sends your business bankrupt.

 

[Wasworkinallweek]

Lack of doing homework and as has been said overestimate of sales .

Someone said to me add up all your overheads( including your own wages) each year round up all the figures to the next highest pound add on vat (when it was 15%) divide it by 46 (46 working weeks) then divide that by 5 (5 days a week)Thats your daily needs .

isnt that simple , if you work more than 5 days a week thats the jam on the bread likewise if you work more than 46 weeks a year .

is it that figures can say whatever you want and its not till the money is all gone that you realise its too late ......

 

[Moneyman]

I have been involved with at least 10 failures and 20 odd sucesses. I would put it down to the following.

1. Not scaling back fast enough early on when there are problems.
2. Cash flow not being checked regularily and panicing too late.
3. Just an idea that didnt work or catch on. Sometimes good ideas and better products fail.
4. Having too much structure and overheads and not moving quickly to go where the money is.
5. Pride.
6. Something better comes along. why stick with something that isnt really working. better to stop and start again.
7. Watch the customer and make sure you never leave yourself vunerable to them going down.
8. Not enough cash to cover a slow start.
9. cashflow.
10. ditto.

Dont sweat it. failure is just a blip. I still get it wrong with some and many startups are very high risk high reward. You learn you move on. If you dont like risks get a job in tesco.

 

[LukeTheHorse]

The most successful Businesses are those who can allow their consumers to run smaller scale businesses from their products or services.

That's the key.

 

[Retired_Accountant]

I recall something I heard many years ago ................



Working for yourself is easy, any fool can do it.
Getting PAID for it is the clever bit.

 

[Jet Virtual]

I think it is costs eating up the profits. "Turnover is vanity, Profit is Sanity"

Keep costs as low as possible and keep an eye on your profits!

 

[Matt G]

I have more reasons why some business fail in the first year:

1. Not making a professional audit over the niche/business they want to cover
2. Assuming a fake budget for the investment. So not a realistic cashflow
3. Not doing a professional work. Low Quality work of employees
4. Poor Advertise
5. Low database of clients

 

[jfe-rendersystems]

We hung on by a thread in our first year, in fact we are still in the recovery process there were two reasons only it was difficult. The recession obviously, less to go at - no body pays in construction during a recession. Secondly, the HMRC and their CIS scheme. this has to be the worst run operation in the UK - its a joke, existing on a totally rubbish scheme which is run by an even more totally rubbish and inept organisation is the bottom of the bottom most pit.

This lot (I am convinced) are set up to squeeze small business into the ground not to help them grow.

 

[DavidBerryACMA]

Most companies seek investment to get started. They focus on expenses ie what they are going to buy, getting a property, buying stock etc. The clock starts to tick and their investment - big or small - starts to get smaller. They find it tough to think creatively as the bank balance makes depressing reading. Before very long, they simply face closure and they run out of money.

What's the alternative? Make sales as quickly as possible and create a successful blue-print. By putting sales first and expenses second the business can be successful from day one. You only need one sale to make the business profitable.

All companies need a business plan. It is the map that guides them. However, the focus of the business plan should only be on one line - sales - the toughest one to work out and the toughest one to deliver. However, if the company makes profitable sales it won't ever go out of business.

 

[termsandconditions]

Government research shows that the major reason for business failure is poor cash flow. This is caused by primarily lack of sales and secondly by poor credit management (late/non payment of debtor invoices).

Best Regards

 

[iBusiness Forums]

Unrealistic expectations is a key factor in small business failure. Many people go into it without knowing what they have let themselves in for. Before you know it, they are knee deep in tax legislation, marketing problems, cashflow issues, late payers and so on.

Own business = hard work!

 

[Blood Lust]

Government research shows that the major reason for business failure is poor cash flow. This is caused by primarily lack of sales and secondly by poor credit management (late/non payment of debtor invoices).

Best Regards

When you startup a business funds are limited. If you get 10 customers and give them all credit that can be your money gone.

If a bill comes in before payment does then you're bust.

A bank will look at your assets (credit sales are assets) but in the current economic climate may decide not to give you a loan to cover your shortfall.