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.
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
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
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:
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.
Allocating time in the diary once per week to review the most recent financial information as follows:
Profit and loss:
Key Performance Indicators:
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.
Target Market Demographics:
Compelling Competitive Advantage:
Your Best Marketing Channels:
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)
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.
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.
Take steps to learn and develop these skills:
Communicate with your staff:
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.
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.
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:
Do It Yourself:
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.
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.
UK Business Mentoring Group