Small businesses fail for a number of reasons, the most common being a lack of planning and preparation. Other contributory factors include insufficient funding, unrealistic growth projections, and an over-reliance on a single product or service. Poor management is also often to blame, as is an inexperience with the complexities of running a business.
In many cases, small businesses simply don’t have the time or resources to compete with larger companies. This is particularly true in sectors where there are high barriers to entry, such as retail and manufacturing. Nevertheless, UK small businesses continue to play a vital role in the economy, and there are many success stories despite the challenges.
Most common reasons why small businesses fail
There is no most common reason why small business fail, it can be a combination of a number of factors, we take a look at the most common reasons why a business has failed.
1. Business owner is unqualified
One of the most common misconceptions about running a business is that it is easy. In reality, it takes a tremendous amount of hard work, dedication, and commitment to be successful. There are endless hours of research, planning, and implementation that go into making a business successful. Without the proper qualifications, a business owner is simply not prepared for what it takes to run a business.
They may be able to get by for a short period of time, but eventually the lack of experience will catch up with them. Running a business requires long hours, dedications, and determination. Those who are not willing to put in the work will not be successful. It is important to remember that being a business owner is not a 9-5 job. It is a 24/7 commitment that requires constant attention and effort. Those who are not ready to make that commitment should not attempt to run a business.
2. Started the business for the wrong reasons
Many people go into business with the primary goal of making money. While there’s nothing wrong with wanting to turn a profit, this singular focus can often lead to failure. When profit is the sole motive, it’s easy to cut corners and make decisions that are not in the best interest of the business.
For example, a business owner might choose to skimp on advertising or forego necessary repairs in order to save money. However, these short-term savings can often lead to long-term problems, such as a decline in sales or an increase in expenses. Business owners who start their businesses for the right reasons, such as a passion for their product or a desire to provide a needed service, are more likely to succeed in the long run.
3. Unable to raise finance
Poor credit history and a lack of a proven track record can make it difficult to raise finance for a startup or growth business. This is because potential investors will be reluctant to lend money to a business that has no track record of success. They may also be concerned that the business will not be able to repay the loan if it fails. As a result, businesses with bad credit or no track record often have to offer higher interest rates to attract investors.
However, this can put them at a competitive disadvantage and make it even harder to turn a profit. In some cases, businesses may be able to overcome these difficulties by offering equity in the company instead of financing. This can give investors a stake in the success of the business and provide them with some security if things go wrong. It is important to remember that giving away equity will dilute the ownership of the business and may not be the best option for everyone involved.
4. Trying to do it all
Small business owners are often forced to wear many hats, but this can lead to burnout and an inability to focus on the tasks that are most important to the success of the business. While it may be tempting to try to do everything yourself, it is important to recognise your own limitations and delegate tasks accordingly.
By understanding your strengths and weaknesses, you can create a more efficient workflow and avoid becoming overwhelmed. Additionally, it is important to remember that you cannot do everything in one day – Prioritise your tasks and give yourself some breathing room to avoid getting bogged down in the details. By taking some time to assess your own abilities, you can set your business up for success while avoiding burnout.
5. Failure to hiring the right people
A small business can only be as successful as the people who work for it. Hiring the right employees is essential, but it can be difficult to find candidates with the right skills and experience. Additionally, small businesses often have limited budgets, which can make it difficult to compete with larger companies for top talent. Some people may view working for a small business as a stepping stone to a different career, rather than a long-term commitment. As a result, failure to hire the right people can severely hinder a small business’s ability to grow and succeed.
6. Failed to understand your profit margin
Business failures can often be traced back to a misunderstanding of profit margins. The cost of sale is the direct costs associated with producing a product or providing a service. This includes materials, labour, and any other direct expenses. The profit margin is the difference between the cost of sale and the selling price.
In order to make a profit, businesses need to ensure that their selling prices are higher than their cost of sale. However, many businesses fail to properly calculate their profit margins, resulting in financial difficulties down the road. By understanding and calculating your profit margin, you can help ensure the success of your business.
7. Unable to compete with larger business
Economies of scale is the key reason why small businesses have a hard time competing with larger businesses. When economies of scale are in play, larger businesses always have an edge because they can produce more at a lower cost per unit. For example, let’s say that a small business and a large business both produce pencils.
The small business might produce 10,000 pencils per month at a cost of £0.50 per pencil, while the large business produces 100,000 pencils per month at a cost of £0.40 per pencil. The large business has an economies of scale advantage, which allows them to sell their pencils for less and still make a profit.
As a result, the small business will likely have to raise their prices and/or lower their quality in order to compete, neither of which is an ideal option.
Small businesses that are unable to compete with larger enterprises may face various business problems, including reduced market share, lower profitability, and limited growth opportunities. This can lead to financial instability, decreased employee morale, and even closure of the business in some cases.
8. Costs started to spiral out of control
When starting a small business, it’s important to have a solid financial plan in place. This includes knowing how much money you’ll need to get started and how much you can expect to bring in each month. However, many small business owners don’t factor in all the costs of running a business.
In addition to the obvious expenses like rent and inventory, you also have to pay for things like business rates, energy, transport, and wages. If your costs start to spiral out of control, it can quickly become difficult to keep your business afloat. Therefore, it’s important to be mindful of all the potential costs of running a small business before you get started. By doing so, you’ll be in a much better position to succeed over the long term.
9. Not having sufficient reserves
Small business fail to hold cash reserves, these reserves are needed to settle liabilities that are not seen for months ahead. As most small business are focused on today, they forget to hold back reserves.
They either run out of money before they can turn a profit or they invest too much in growth and end up collapsing under the weight of their debt. The key is to strike a balance between short-term needs and long-term goals. By carefully managing their finances, small businesses can stay afloat long enough to achieve their goals.
10. Not having an eye on the numbers
Small businesses in particular need to keep a close eye on their numbers. Insolvency can happen quickly if income falls and debts start to mount up. Over-trading is another danger small businesses need to be aware of. This is when a business takes on too much work, often to try and make up for falling sales.
This can lead to cash flow problems and eventually insolvency. Keeping track of your business’ financial performance is essential to avoiding these traps. Knowing your key numbers will help you spot problems early and take corrective action. This way you can keep your business on track and avoid financial difficulties further down the line.
Many businesses, both small and large, fail due to a variety of reasons. Poor communication amongst the team, subpar customer service and an overall lack of strategy or vision are just some of the main issues that can lead to a business’s downfall. In addition, many founders fail to take into account other external factors such as financial and tax regulations, which can also wreak havoc on the sustainability and profitability of a company.
Therefore it is essential for any business founder to do their due diligence in research and planning before jumping into new ventures in order to minimise the chances of failure.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.