13 reasons why small businesses fail – and what can be done to help prevent it

19th December 2018

’Tis Christmas and the time for festive cheer, tinsel, gifts and goodwill to all men. But it’s not all carol singing and roasting chestnuts by an open fire. It’s also a very difficult and stressful time for small businesses, with some facing failure and having to shut up shop, so we’ve looked into the common reasons why most small businesses fail.

Now, at this time of year perhaps more than ever, the spotlight falls firmly on small business as analysis on how they are performing becomes more pertinent.

For retailers, it’s busy beyond belief, with consumers making the most of tempting bargains and Black Friday deals to snap up Christmas gifts for loved ones. Both on the high street and online, shoppers are flooding in to spend their money.

So, there should be no problem, right?

Wrong. According to research from analysis firm Springboard, in November 2018, the number of people out shopping in the UK dropped to its lowest level since the 2008 recession, while footfall on the high street, at retail parks and in shopping centres fell 3.2%.

Online shopping is the biggest challenge faced by small business, while the ongoing uncertainty surrounding Brexit is also having an impact. But it’s not just retailers who are under threat – it’s every small business.

And it’s not just this time of year that the struggles are felt. It’s a problem all year around. In fact, eight out of 10 small companies will fail within their first year. It’s just that now, over the cacophony of Christmas tunes, we hear about it more.

So why are small businesses not only struggling, but failing? And what can be done to help prevent it? Here, we look at 13 reasons why.

Common reasons why small businesses fail:

Poor management

Business can fail because of a lack of direction – a lack of leadership.

Without someone to ably steer the ship, someone who has the right credentials in terms of financial management skills, employment expertise or even the most basic of management skills, the ship will hit the rocks.

Poor management is probably the number one reason why small business fail. Decisions have to be made, and the right person has to be in charge to make those often crucial calls.

All successful businesses have one thing in common – great leadership.

If a small business owner is lacking those skills, there are always ways to educate themselves, outsource work or gain help from competent professionals.

No business plan

Anyone who starts a business without a plan is fooling only themselves.

Without planning, whether it’s short-term or long-term, a business will fail.

Every business needs a plan, especially for the next 12 months, and ideally that should clearly set out where you will be, how you’re going to get there, what you aim to achieve, what challenges you will face, and what results you expect to gain.

It should all be written down and set in stone, with dates and deadlines. A well thought-out plan and strategy will help you prevent serious implications for your business.

Lack of cash

Without money, where are you going? It sounds ridiculous, but if you are going to succeed, you will need enough cash behind you to do so.

A lack of capital will make it difficult for a business to grow, which is why it’s vitally important for every small business owner to ask themselves the following:

  • How will you pay the bills?
  • How will you stay afloat if you don’t get paid?
  • How will you pay your staff?
  • How will you afford stock or materials?
  • How will you survive through seasonal slowdowns?
  • How will you attract new investors if you have no capital?
  • How will you honour other financial commitments?
  • How will your business run day-to-day?

Failing to track your finances

A small business owner may not be good with numbers. Or they don’t like having to write down financial records.

That’s no excuse. Take one look at businesses that fail and you will see that many of them simply got into too much debt.

By keeping on top of your finances and keeping strict records of where your money is going and what is coming in, you will be in a much, much better situation. It’s a no-brainer.

If you’re really struggling, a financial expert can teach or train you, or completely take the weight off your shoulders.

Wrong location

Location, location, location. It’s become a cliché, but it is important.

Are your overheads too high? Because that’s going to sap your resources.

But alternatively don’t go for the cheapest lease, because although it might save you some money, you won’t get it back if it’s not convenient for your customers.

Are you accessible? Because if you’re not, how will your customers get to you?

If your business relies on footfall, you have to be somewhere where your customers can travel to. If you’re not, your customers will go elsewhere.

Where are your competitors? Because you don’t want to set up shop on the doorstep of your nearest rival…

Ignoring your customers

The customer is always right. So listen to them.

You want to them to remain loyal to you, but that is not easy. You have to care for your customer and treat them with respect, make them feel loved and give them value.

If you don’t, your competitor will.

So you have to listen to them, because businesses who deliver higher customer satisfaction rates are seeing their revenues increased and customers remaining loyal to them.

And in this digital age, hearing your customers’ voices has never been easier. Whether it’s through social media platforms, or customer surveys, your consumers have a voice and they will use it.

Use that feedback to see where you can improve your business.

Underestimating the opposition

Keep a close eye on what your rivals are doing.

You don’t want the competition outsmarting you, you want to stay a step ahead of them.

So you need to be a bit savvy, whether it’s watching out for latest deals they’re offering, or a new product they’ve launched, or a new marketing strategy they’ve unveiled, you need to be on it.

Lack of marketing strategy

Your own marketing strategy has got to be clear – if you don’t tell your customers who you are, what you are and where you are, how will they do business with you?

Promoting your business and advertising does not have to cost the earth, especially in this day and age when you can go online.

Find out what’s going to work best for you, experiment with some social media platforms, do some research, but don’t overextend yourself.

You want to find what’s going to be most beneficial to your business – then go for it.

Poor accounting and bookkeeping

Bookkeeping and administration can be a bore to some, or an inconvenience.

True, it’s time that can be better spent on growing your business, but ignore it at your peril.

It’s critical that you keep track of everything that comes in and goes out of your business, because if it becomes a mess, what does that say about your business?

By ignoring receipts, invoices, transaction details, or even HMRC, a small business is going to find itself in trouble.

If you can’t/won’t do it, find someone who can.

Complacency

Small businesses can fall into a trap if they’re doing well.

Business is good, profits are up – but that all leads to a false sense of security that everything is working well, that nothing else needs to be done.

That will only end up having an impact on productivity, because when you’re resting on your laurels, with your feet back, something will come crashing down on you and upset the apple cart in a big, big way.

Don’t let it. Never take anything for granted.

No performance data or analysis

If a business doesn’t pay attention to data, to reports and to analysis, they risk getting left behind.

It’s easy for the big boys to spend money on performance data, but it’s equally important for small business to pay attention too.

Without that performance insight – such as the number of people entering you shop or what’s your best-selling product – you will not be in the best position to make smart, data-decisions or respond to latest trends and act accordingly.

Growing too fast

It’s the good old tortoise and the hare analogy. Slow and steady wins the race.

Too many businesses become too successful too quickly – and then it all caves in.

It doesn’t sound right that too much business could ruin you, but it happens all the time and is one of the leading reasons why businesses fail and end up bankrupt, because they confuse success with how quickly they can expand.

Small businesses must focus on slow, steady and predictable growth, without draining cash and, eventually, reducing overall profitability.

Growth has to be managed carefully, sensibly and only after full research and analysis.

Choosing the wrong business

Why did you choose this business? That’s what every small business owner has to ask themselves before they commit.

If they’re doing it for the wrong reasons – such as to make lots of money or be their own boss – they are likely to come unstuck.

Choose a business that is going to be profitable, that you’re passionate about, that will provide a service or product that is going to fulfil a need in the marketplace, that will drive you to succeed. You’ll be all the better for it.

How can we help you?

RDG Accounting are specialists in providing a comprehensive range of accounting services and support to a variety of businesses, from start-ups and sole traders to limited companies.

We know and understand that in today’s complex financial and business world, a reliable, professional chartered certified accountant is essential in managing your business finances.

We offer a range of services that will help your small business survive and prosper, and not become another statistic in the amount of failures we constantly hear about.

RDG can help you with:

If you’re a small business and you would like to discuss anything further with us, or would like some one-on-one advice in more detail, please fill in your details below and one of the team will be in touch. Alternatively, give us a call on 0333 200 0714.

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