Finance April 23, 2014 Last updated January 11th, 2022 2,024 Reads share

8 Key Reasons Why Small Businesses Fail

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Making a success of a personal business venture is not easy. 80% of small companies eventually fail, according to a BBC report of 2010. So why do new companies struggle, and how can small company owners try and ensure they become one of the ‘other 20%’.

#1. An unrealistic business plan

You will almost certainly have heard the expression ‘if you fail to plan, then plan to fail’. Starting a new company should mean that you engage in a meticulous planning exercise. Examples of areas your business plan should address include:

  • Your intended business activities
  • Marketing strategy
  • The number staff you will employ, and what they will do
  • Your intended business location
  • Systems & controls – how you will ensure your business operates smoothly and meets its legal and regulatory obligations? This should include details of the information technology you use and the security measures you will put in place
  • Detailed financial forecasts, such as cash flow and profit & loss statements. Details should also be provided of how you have arrived at the forecasted figures.
  • How you will obtain start-up capital, e.g. savings or bank loan? How will you provide funds until the first orders are received, and until payment is received for these? Depending on the nature of the product and the attitude of your customers, payment might not be received until many weeks after the sale on occasions.

It is a good idea to seek professional advice on your business plan. If you wish to obtain a loan or any other form of finance, your business plan must be as detailed and professional as possible.

#2. Difficulties obtaining credit, or borrowing too much

Failing to obtain credit can be a terminal blow to small companies. It can be difficult to obtain business loans from banks, and one of the main reasons why small business loan applications are declined is that the company cannot provide sufficient security for the loan – examples of acceptable security might be company property or assets or a personal guarantee from the owner.

You might therefore want to look at other alternatives such as Government backed schemes like the Enterprise Finance Guarantee Scheme and the Funding for Lending scheme, or options such as asset finance.

Some companies have growth plans that are unduly ambitious, which result in them borrowing large amounts to fund significant expansion. They are then crippled by their debts and the interest repayments on these large loans as the expected growth in revenue never arrives. Make sure you carefully consider what level of growth you can realistically expect, and never take on credit commitments if you have doubts over your ability to repay them.

#3. Other cash flow problems

You can reduce the chances of cash flow problems by controlling costs, by doing all you can to get customers pay promptly and by managing stock levels. We shall examine the issue of reducing expenditure later in this article. If you have too much stock it can lead to high storage and insurance costs, and there is also the risk of the product going out of fashion before the stock can be sold.

#4. Poor market knowledge

Some companies start trading without taking time to understand the market they operate in, the size and nature of the competition, or the wishes and needs of their target customers.

Be prepared to learn from your early experiences. Many new companies can look very different after a few years of trading to the way they started out, simply because the owner now understands the market so much more clearly. Examples include withdrawing certain products entirely, or concentrating on a specific niche within your chosen marketplace.

#5. Insufficient marketing

Very few people will have heard of your company on the day you start trading. Ensure you allocate sufficient resources to telling people who you are and what you can offer. Think carefully about which methods of marketing are most appropriate for communicating with your intended customer base.

#6. Not adapting to changing market conditions

Many companies experience difficulties if potential customers feel the need to cut their spending, as often happens in an economic downturn. Other industries may contract as consumer habits alter, for example book and CD retailers have been badly hit by the growth in online shopping and other advances in technology. If your industry contracts, have you got a backup plan? For example, there could be other areas that you could diversify into. Any such move will require the same level of careful planning as is needed when starting out.

Technological advances can also change your chosen business sector beyond recognition very quickly. If you are still trying to sell products that have been superseded by better versions, or you have large amounts of ‘white elephant’ stock, you are unlikely to be successful.

#7. Lack of experience of many business areas

When you start your own company, you may be responsible for a number of areas for the first time. Unless you can afford to employ specialist staff, as the head of the company you will need to be a veritable ‘jack of all trades’. You may need to think about how you can gain the necessary skills to manage functions such as finance, marketing, compliance etc, and what training and guidance you need.

#8. Incurring unnecessary expenditure

Some people want their company to look like a professional enterprise, perhaps with a staffed office, business stationery and a website. But are they really necessary? Should you instead run the company from home; at least in the formative stages where your company is in relative infancy? Many small companies have a website, but in many cases very few customers actually contact the company as a result of seeing them online – at least in the early stages.

Investing in an all-singing, all-dancing website might be something you should consider further down the line – in the meantime there are always free social websites you can take advantage of to create a web presence.

Images: ” Red and green street signs with blue and stormy sky with words Success and Failure, Success versus Failure / Shutterstock.com

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Keith Tully

Keith Tully

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