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In 2022, more UK businesses closed (11.8%) than opened (11.5%). To help small businesses avoid failure, the article outlines ten common reasons businesses fail, divided into factors beyond control and within control, and provides practical tips and strategies to navigate and overcome these challenges.
Factors Beyond Control:
Factors Within Control:
In 2022, more UK businesses closed (11.8%) than new businesses opened (11.5%). According to the UK Office for National Statistics, 345,000 businesses shut down, while 337,000 new businesses opened.
Around 20% of businesses fail in their first year, and up to 60% shut down within the first three years. Why do so many small businesses fail as they're starting out? And what can they do to navigate turbulent times, sustain their business, and eventually grow?
If you're a business owner or solopreneur, to avoid a similar fate, understanding the common mistakes that lead many businesses to close within their first three years is key.
In this article, I will explore ten reasons that contribute to business failure and provide tips and strategies to avoid these common pitfalls.
It's important to note that the topics and strategies discussed here are not comprehensive or definitive. Each business has its unique characteristics depending on the industry, sector, and location. The main goal here is to help you identify the hurdles relevant to your business and provide a guide to help remedy these issues.
If you have any questions by the end of the article, please don’t hesitate to reach out. I'd be happy to answer your queries!
There are many reasons that can result in business failure. Some reasons are external and often beyond one’s control, such as an economic recession or a pandemic. Other reasons are largely within one’s control, such as poor cash flow management or bad leadership.
It’s important to distinguish between the nature of the factors that can lead to business failure, as this understanding can help you prepare more effectively.
Let's go over five factors that are beyond control, and then move to another five that are within control.
Here’s a caveat: the points mentioned here may not always have the same effect on all businesses. Depending on the sector you're in, external factors may end up affecting you differently than other businesses. It’s important to keep that in mind when considering all the various forces at play.
Having said that, what are some external elements that may pose a threat to your business?
During an economic downturn, consumers and businesses tend to spend less. As a result, your business may be affected for reasons that don’t directly relate to the quality of your product or service.
Whether you sell products or services, your sales and revenue may be affected. Acquiring new customers or retaining existing ones may become difficult.
The question that you ought to ask yourself in this case is: what can you do to navigate these turbulent waters successfully?
You can explore one of the following options:
Staying on top of your game is tough, especially when market competition is fierce. Take a look at the AI and LLM race.
The competition is brutal between OpenAI’s GPT, Google’s Gemini, Anthropic’s Perplexity, and Microsoft’s Copilot, among many others.
They all want to become the leader in the market. So what can one do in this case? Obviously, this example is more on the extreme side of things.
If you’re a solopreneur or a small business owner, your concerns are radically different from those of the CEOs of big corporations. The main idea is the same, though.
Are you a fitness coach, a dentist, an artist, a retailer, a teacher, or an accountant? It doesn’t matter; there are many others and businesses offering the same products or services.
The questions to address are: what do you bring to the table that differentiates me from the competition? In other words, what’s your unique value proposition? Why should a customer choose you over another business?
Here are a few possible angles to consider:
The most dreaded of all is perhaps regulatory changes. Almost overnight, you could find yourself stranded with the pressing need to adapt to legislation that has been recently passed. Compliance, consumer duty, data protection, a license update, a new certificate that you need to get, and a lot more. If you don’t comply, the consequences might be dire; you may be fined, or your business will be foreclosed.
So what can you do to avoid such a problem?
We are in a technologically accelerated age. New tools and technologies are popping up on the market every other second. It’s an overwhelming situation, for sure. By the time you get a new service or gadget and get used to them, new services and gadgets will have made it to the market.
The cycle goes on. Technological disruption may affect your business differently depending on the sector and size of business.
If you’re a freelancer, you can quickly switch services or products and adapt in a prompt manner. If you’re a small business owner and already have a system in place, it might take you a lot more to make an adequate decision about adopting new tech.
Whether you work alone or manage a team or a company, the best ways to deal with potential technological disruption is by keeping an open mind and doing the following:
I won’t dwell on this one. If you’re reading this article, chances are you’ve lived through the pandemic and know the level of disruption such an event could cause. It was not easy, to say the least. In hindsight, though, it’s important to evaluate how one could prepare for a similar event in the future. In this case, here are three things to keep in mind:
A study by US Bank showed that 82% of businesses fail due to cash flow problems. Cash flow refers to the money moving in and out of your business. Positive cash flow occurs when more money comes in than goes out, while negative cash flow is when more money goes out than comes in. Importantly, this is not directly related to revenue or profits. You could theoretically be a profitable business and still face significant challenges if you don’t manage your cash flow effectively.
Consider the following example. Imagine you run a landscaping and gardening company. On paper, you're profitable, earning an average revenue of £15,000 per month with total fixed and variable costs of £10,000. Your profit is around £5,000 per month. For simplicity, let’s assume you have no savings and you’ve just started this business. Your projections look good, and the business is thriving.
Now, suppose in the coming months you encounter unexpected extra costs. You’ve issued invoices to your customers with a due date of 60 days. Some customers pay on the last day; others are late. Meanwhile, you must pay salaries, rent, bills, and personal expenses. You will make money, but it’s not entering your account immediately. You're spending a lot and might even need to borrow money to cover these costs.
With poor cash flow management, you could quickly find yourself stressed over money problems despite having a profitable business. This is why paying attention to cash flow management is crucial. How you manage your cash flow is largely within your control. Here are some common causes of cash flow problems and tips to avoid them:
Common Causes of Cash Flow Problems:
Key Strategies to Improve Cash Flow:
A strategy gives you an idea where you’re heading, and the plan is all the concrete steps you’re going to be taking to get there. Many businesses fail because they don’t have a clear strategy, struggle to solve problems as they arise, end up spending money on things they could have easily avoided, and sometimes attempt to reinvent the wheel when all they needed to do was sit down and think about what their strategy is.
A strategy is not set in stone though. But it will help you think about the problems you're facing, what you want to accomplish, and how to have a clear roadmap for your business, including what product or services to offer, whom to target, what pricing you’ll be adopting, and how to market it.
I’ve previously written about the importance of having a strategy, especially if you’re self-employed or a small business owner. If you don’t have a clear strategy, be it in your business or personal life, you might end up facing all types of problems that will complicate the decision-making process for you.
Here's the thing, though. If you’re thinking now: “oh what a bunch of bollocks, I would rather wander aimlessly and see what happens!” This is fantastic. You’re fully aware of your preferences, and your strategy is that you’d want to explore new venues and see what happens. Maybe you want to discover yourself and the world. Perhaps you’re not sure about the type of product or service you want to build or offer. In this case, your strategy is still clear. You know that you want to explore uncharted territories, and you will in fact plan accordingly.
In this case, you’d need to think about how to spend your money wisely, whether you want to stay in your hometown or travel the world, and stuff like that.
The most important part in all this is that you need to keep in mind that having a clear strategy will help you develop an action plan that will make your decision-making easier when problems arise.
Here are five questions from author Roger L. Martin you can ask yourself when thinking about a strategy for your business:
What are our broad aspirations for our organisation & the concrete goals against which we can measure our progress?
Across the potential field available to us, where will we choose to play and not play?
In our chosen place to play, how will we choose to win against the competitors there?
What capabilities are necessary to build and maintain to win in our chosen manner?
What management systems are necessary to operate to build and maintain the key capabilities?
Another reason why businesses fail is that they rely heavily on a few big customers only. If one of them leaves for whatever reason, your revenue can be significantly impacted.
There are many reasons why you might prefer to rely on fewer clients. Whether you prefer to work fewer hours or ensure that you’re paid on time, these are justifiable reasons for sure. But irrespective of your reasons, it’s important to know that the failure risk is quite high if you won’t take the necessary precautions in case one of these clients drops. So what can you do to deal with this problem beforehand?
Marketing is one of those activities that are easier said than done. How many times have you heard someone tell you: “you should do more marketing to sell more and grow your business.”
You don’t say, Sherlock!
There are only so many hours in a day, and during these hours, you’re supposed to attend to your business, your personal and family matters, eat, exercise, have some rest, and maybe a few other things too.
As a solopreneur or small business owner, you don't always have the time or resources to focus on marketing.
Yes, marketing is essential. No matter how good your product is, if no one knows about it, no one will buy it. It will take at least 10 true fans for word-of-mouth to spread. And that’s only if the product is really good and people love it. Even then, well, you need to let 10 people know that it exists.
Marketing really isn’t easy. It takes a lot of time and effort to strategise, understand your target audience, and build a brand that distinguishes you from your competition.
It’s possible that you end up spending money and effort haphazardly, without a clear strategy or plan. I’ve written more extensively about effective marketing strategies for small businesses. So in what follows, I’ll just include some tips to avoid the ineffective marketing problem. If you want to learn more, you can check out my article or reach out to me for further questions. I would be glad to discuss this further and exchange some ideas.
Some tips for a more effective marketing:
Last but not least, one of the reasons that businesses fail is weak leadership. This applies both to whether you run a team or work alone. Leadership doesn’t have to mean knowing how to lead others only. If we stretch the definition a bit (please allow me to), then it can also mean being able to do some introspection, cultivate your self-awareness, know what your strengths and weaknesses are, what skills you need to sharpen, what things you might be better off delegating or outsourcing, etc.
In that sense, weak leadership means not being able to handle the problems you face effectively and efficiently. A good leader knows how to practice extreme ownership, in the words of Jocko Willink and Leif Babin, to learn from their mistakes, make better decisions, and get the best out of themselves and others.
If you don’t work on cultivating the right mindset and leadership skills that will help you take on the challenge of running a business, then sooner or later you will find it extremely difficult to sustain the business. Why? Because you will be drowned in problems left and right.
As a leader, you will have to set the direction for yourself and others, manage your business properly, motivate your employees if you have any, and understand what your limitations are to fill these gaps adequately.
If you want to improve your leadership skills and don’t know where to start, I highly recommend Willink and Babin’s Extreme Ownership and The Dichotomy of Leadership. They have really good insights drawing on their experience in the Navy SEALS and applying it to a business context, giving firsthand examples based on the work they did with different companies.
Here are some tips to keep in mind as a starter point to think about avoiding falling into the trap of weak leadership.
Some tips to cultivate better leadership skills:
When I decided to write this article, my initial plan was to focus on how to grow your small business, specifically within the UK market. However, as I began my research, I noticed that growing a business largely depends on establishing a robust foundation to survive economic downturns and other forces that commonly cause businesses to fail in the first place.
I decided to pivot, dedicating the first article to the reasons businesses fail before highlighting some strategies that will help you grow.
I can invoke numerous philosophical ideas here but won’t because the article is already long enough. A quick comment here is warranted, though. Nassim Nicholas Taleb emphasises the concept of via negativa in his book Antifragile and elsewhere. It means that sometimes knowing what to avoid (via negativa) is as effective as knowing what to do. In other words, if you want to, say, live a good life, it makes sense to first think about how you’re going to survive.
Similarly, if you want to grow your business, you ought to think about what to do to avoid going bust in the first place. Because it’s pointless to implement strategies for growth when you have a negative cash flow that forces you to shut down or an acute case of bad leadership, ineffective marketing, etc.
PS:
If you’ve managed to read this far, I hope you found this article helpful. And stay tuned for the second part with some tips and strategies to grow your business. Until then, try to revise your current practices to evaluate whether or not you risk failing as a business.
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