The Top Six Reasons Small Businesses Fail – and how you can avoid them!

On average every year in the UK over 304,000 businesses will fail. By contrast each year around 360,000 businesses will be created as this Government chart shows:

Birth and death rates of businesses

UK, from 2016 to 2021.

Source: Office for National Statistics - Inter-Departmental Business Register

20% of businesses fail in their first year and around 60% will go bust within their first three years.

Recent Government statistics show recent peaks in business closures, Q1 of 2022 being particularly high off the back of the pandemic but still Q1 of 2023 shows a worrying level of closures, ignoring the former it was the highest closure rate in six years:

Business closures were lower in Quarter 1 (Jan to Mar) 2023 than in Quarter 1 2022.

Number of businesses removed from the Inter-Departmental Business Register (IDBR), quarterly, UK, Quarter 1 2017 to Quarter 1 2023

Source: Office for National Statistics - Inter-Departmental Business Register (IDBR)

Also troubling is that the number of businesses created in Q1 2023 were 22% lower than the same period last year:

Business creations in Quarter 1 (Jan to Mar) 2023 were 22% lower than in Quarter 1 2022

Number of businesses added to the Inter-Departmental Business Register (IDBR), quarterly, UK, Quarter 1 2017 to Quarter 1 2023

Source: Office for National Statistics - Inter-Departmental Business Register (IDBR)

So why is it that so many businesses fail, what are the common causes that we can learn from?

There is a paucity of information on the government websites as to the actual reasons and that is not surprising because how would they know? A lot of these failures are the self employed/sole trader or micro firms and the only people who would really know why it failed would be the owners themselves or maybe the accountants. Even less likely to know is the liquidator/administrator who only appears when the cash runs out and will see that as the cause.
In fact, in my experience the cash running out is the symptom, not the cause, a business may run short of cash but there will have been many other shortcomings in that business that create that situation.

Having worked with hundreds of businesses over many years I have encountered many situations where a business was failing, had already failed or was brought back from the brink of failure and from those experiences I offer up my top six causes of business failure together with my advice and suggestions as to how to avoid these pitfalls:

Insufficient Focus on key areas of the business

It’s all too easy for a business owner to get so embroiled in the day-to-day operation, doing too much of the ‘doing’ that they forget (or avoid because it’s not in their comfort zone) to focus on key information, review it and take action on it.

Avoid failure due to insufficient business focus by:

Allocating time in the diary once per week to review the most recent financial information as follows:

Profit and loss:

• Was the sales line as expected?
• Is your gross profit margin percentage in line with expectations?
• Any fixed costs you were not aware of?

Debtors Report:

• What debtors are overdue?
• When were they chased?
• What action will come next?

Creditors Report:

• Are any creditors overdue (including VAT/PAYE etc)?
• Has someone spoken to them to ask for more time (don’t just ignore them, they won’t go away!)

Cash:

• What is the current cash position, complete a simple cash flow forecast to show your requirements over the next few months?
• Are there any ‘pinch points’? If yes, how can you overcome these?

Key Performance Indicators:

• Do you know what your KPIs are? If not, establish them and track them on a regular basis.
• Use SMART Goals where possible as this helps to remove abiguity
  The above list is not exhaustive but are some of the most commonly overlooked areas.

Inconsistent Marketing

In my experience only around 10% of small businesses have a marketing plan, there will normally be some marketing activity but it is not consistent, not measured and very little planning goes into it.

Avoid failure due to inconsistent marketing by:

Target Market Demographics:

• Define who it is you want to reach with your message about your product or service.

Psychographics:

• What makes your target buy from you?
• What problem are you solving for them?
• What will trigger their interest?

Compelling Competitive Advantage:

• What is it that sets you apart from your competitors?
• Why should people come to you?
• What is it that differentiates you from the competition?

Your Best Marketing Channels:

• What marketing channel(s) will you use to reach these people? Email, phone, social media etc the list here is very long but always be thinking about your target audience
• Where does your target audience hang out? This will help you identify the best medium to reach them.

Create a Marketing Plan based on the above:
Do not be put off by the word ’plan’; an effective marketing plan for a small business can be one or two pages. Once it’s created, share with your team, get others involved as appropriate and importantly review the plan regularly (weekly in the early days of the plan to ensure implementation)

Over Reliance on a Few Clients

It’s always exciting when you win that large client that can send your turnover and profits soaring. However, sometimes that large client can become very time consuming and the risk is that some of your other clients get neglected and you start losing other business.

Where you have one or more clients that make up a large percentage of your annual turnover then yes, look after them of course but plan ahead for the day you lose them. That may seem rather negative but, you can lose a large client for many reasons; a lot of them outside your control. I had a client who lost their largest client just because a new director was brought in who wanted to bring their service provider from their previous company onboard.

Avoid failure due to over-reliance by:

Marketing:

• Ensure you are marketing to bring in other clients to reduce the reliance on the larger ones.

Diversification:

• Some industries can be more susceptible to market forces than others. This was seen clearly during the pandemic when the leisure and hospitality industries were most severely hit during lockdown. If you can, try to spread your client base across different industries.

Reinvest:

• Use some of the profits made from the larger clients in marketing/resources to grow the business across a broader range of clients.

Poor Management/Leadership

You have started your business and then you recruit your first member of staff. Congratulations, you are now a manager, but nobody comes along and says here is a training course, this is how you motivate people, this is how to manage their performance, deal with them going sick etc.

Most business owners, unsurprisingly, have to make it up as they go along and then find that staff don’t always do what you expect and that they have needs and expectations of their boss.

Avoid failure due to poor management or leadership by:

Take steps to learn and develop these skills:

• Attend leadership/management training events.
• Read books on the subject matter. There is a mountain of material out there but I would recommend starting with ‘The One Minute Manager’; a one hour read with some great quick win tips. The same authors have written several good follow up books such as ‘The One Minute Manager Meets the Monkey’; all of which are worth a read.

Communicate with your staff:

• Most importantly communicate regularly with your people
• Find out how they are feeling, what gets in their way, what challenges they have
• And most importantly, listen to them and take action to help and support them
• Try not to take any feedback from staff personally. Any feedback is an opportunity to learn, evaluate and improve. Sometimes you may not agree directly with their feedback, but it can spark a thought in ways you can improve things in a closely related area

Lack of Clearly Defined Processes/Systems

When a business starts up, the processes within a business can be simple; one person is typically involved in the whole end to end process in a particular area and it all works fine. As the business grows more people become involved in the process and the ‘Jack of all trades’ are replaced by more specialist members of staff.

If we think of McDonalds (love them or loathe them) do they have ‘chefs’ in every store producing burgers that are consistently the same in any restaurant, in any part of the world? No, they have staff who follow a process that produces consistent burgers across the globe. Their success is not in a wonderful menu, it is in having processes that produce consistency at the right cost.

Avoid failure due to lack of clearly defined processes or systems by:

• Reviewing your business and decide what the key processes are.
• Mapping out what the process is (or should be) for each key area.
• Engaging with all staff involved within these processes and check for understanding and suggestions to further improve.
• Allocating responsibilities to staff.
• Train or coach staff to ensure they are proficient in their element of the process and build in follow up to ensure the processes work efficiently.
• For larger, more complex businesses it can be worth investing in the services of a process consultant to undertake this work, and also to recommend digital systems to support the processes and streamline them.

No Clear Goals or Strategy

When you start out on any journey/project it makes sense to have a clear goal and an idea of how you are going to reach that objective.

When starting to work with new clients one of the first things we ask is ‘What’s the goal?’ and for a worrying number of business owners there is no plan/no set objectives and the business has been drifting along with very little purpose, all of which means that the staff tend to do the same thing.

It’s ok to say “I want to get it to £10M turnover and then sell it for £3M” but if there is no plan to get it there then let’s be honest the chances of getting there are slim.

Avoid failure due to having no clear goals or strategy by:

Deciding what your goal is. A good start point is to think about when you want to exit, what do you need the business to look like at that point so that you maximise any sale of the business?

Create a plan:
The thought of producing a plan for the business is a big turn off for an awful lot of owners but, it doesn’t have to be onerous. Start with:

• Where are you now?
• Where do you want to get to?
• and then the strategic bit, what needs to happen to get there?

Do It Yourself:

• Unless you are a medium or large enterprise don’t pay somebody else to do it for you. It’s your business, you will know far more than any consultant about your business and if you construct it, you will own it.
• Another real benefit of committing a plan to paper is that just the fact that you have sat down and created a plan will prompt action, spark ideas and opportunities, and create benefits for the business.

Large Business Failures

There are many examples of high profile business failures, Phones4U, Barratts, Poundworld, Tie Rack, Maplin, BHS to name but a few.

The one that I always found most interesting though was Woolworths which resulted in the closure of 807 stores and a loss of 27,000 jobs. A trusted high street name for decades selling lots of useful ‘stuff’ for consumers but what was it known for (other than Pick-n-mix?!). Did it understand who its customers were and what they wanted, did it understand the change in consumer buying habits? What was its long term goal, did it have a plan for the future, was there a strategy or was it just drifting along?

There’s no doubt they did when they first started, but sadly over the years a number of issues crept in. It’s believed they failed due to a large number of reasons ranging from poor management, a poor property management strategy which prevented them from securing more favourable rents, and they failed to keep up to date with the ever-changing retail environment such as the increase in online shopping coupled with the rapid increase in “pound” shops.

Avoid being another statistic

Having a business mentor on board does not guarantee survival or success but what it does do is greatly increase your chances of success.

As business mentors, our role is to ensure that the owner/directors have a clear vision/goal for the business, a strategy to achieve it and then to keep them focussed on the things that will make it happen. Along the journey we help with any challenges or barriers that the business encounters.

If any of the six key reasons outlined above give you cause for concern within your business then get in touch for a complimentary session so that you can experience the benefits of a mentor in your company.

https://www.ukbusinessmentoring.co.uk/need-a-mentor

Joe Hinton
Managing Director/Founder
UK Business Mentoring Group