most common reason uk businesses fail

4 min

The most common reason UK businesses fail

Many businesses fail within the first few years of launch, and common causes include poor financial management and strategic planning. Here we discuss the main reasons why businesses fail and how to sidestep these potholes, putting your business on the path to success.

Glen Foster

Glen FOSTER • Libeo

Published on | Updated on

It's a harsh world out there for entrepreneurs. Coronavirus, changes to export and import regulations and uncertainty caused by the war in eastern Europe have created pretty difficult conditions, to say the least.

According to the Federation of Small Businesses, increasing administration costs, late payments and rising inflation threaten to shipwreck thousands of small businesses. Do you know how many businesses fail in the first year? Statistics show that 20% of businesses fail within their first year and 60% in their first three.

Gosh, that’s a lot.

The good news is that by examining what contributes most to small business failure, you can learn to steer clear of the rocks and keep your business sailing for many more years to come.

What are the top 5 reasons businesses fail?

There are numerous reasons why small businesses fail. But these five common factors have proved more than a bump in the road for many companies:

  1. Undefined goals and poor strategic planning
  2. A lack of leadership
  3. Poor cash flow management
  4. A narrow customer base over-reliant on a few big customers
  5. Poor financial management

We’re sure you’re already providing great leadership, but even the best business owners have some blindspots mixed in with their expertise. So let's look in more detail at how you can make plans that help your business go from strength to strength.

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Let’s talk strategic planning, objectives and results

In a small business, success and failure often depend on the company having a strategic plan that identifies upcoming goals and lays out an approach to achieve them. Where do you want your business to be in six months or a year? Your strategic plan is the map that will get you there.

What's the landscape looking like for your business? Have you determined your objectives – and if you have, how will you know you've achieved them? Do you need an accountant by your side? One way to ensure you're on course is by measuring OKRs (objectives and key results).

With OKRs, you set an objective and identify the key result you wish to achieve. It's essential that this result be quantifiable, so you'll know when you've reached your goal.

Let's imagine a new café is opening. What might the owner's OKR look like? She might say, 'I will let the community know my café is opening (her objective) by handing out 1000 flyers (her measurable result).'

Determined to find the best coffee supplier, the café owner might phrase her OKR as: 'I'll get the tastiest and best value supplies (her objective) by sampling twenty products (her measurable result).'

Strategic planning isn't just about whiteboards and guesswork - far from it! Many free resources are available – a whole bunch of community and regional information can be accessed online. Or how about grabbing your clipboard and doing some customer surveys? Don't be afraid to get out on the streets and discover your customers' priorities.

Just imagine that young entrepreneur about to open a café. She wants to catch the morning rush of commuters slogging their way into work and serve them up a reviving cup of coffee. But what time should she actually open? She's thinking 7.30 am, but after a bit of on-the-street research discovers the factory down the road has one shift that starts at 6 am.

Armed with this info, she opts to open earlier and gets her café off to a great start – although she might need a coffee or two herself!

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Your leadership creates a leading business

For your business to thrive, you need to perfect your leadership skills. An inspiring leader sets challenging but achievable and fulfilling tasks for employees. Quick-witted and decisive, a leader takes action when the business is in danger of going off course. Perhaps most importantly, a leader teaches by example, embodying the positive qualities they want to see in their staff and, by doing so, motivating them towards success.

We live in a changing world, and company culture is no exception. As a leader, a business owner sets the tone of their workplace. You want that culture to be one where employees develop and thrive, becoming an ever more valuable asset to your company.

A business is only as good as its workers. Pay rises and perks often aren't enough if you want to attract the most talented staff. A more holistic approach is needed. If you can find ways to invest in your workers' personal growth and wellbeing, you’re more likely to retain staff and avoid the costs associated with long-term illnesses linked to stress.

Mental health problems are the prime cause of staff absence. According to the Mental Health Foundation, 70 million workdays are lost yearly due to mental health issues, costing employers £2.4 billion per year. That’s a bill that no one wants to pay, and speaking of finances…

What's the number one reason that small businesses fail?

Put simply, it is a lack of financial control.

We understand that you need to focus on running your business – there are suppliers to call, shifts to schedule and a hundred and one problems to sort out. You've got your hands full just providing the services and goods that earn you money. But every entrepreneur needs to know what their financial position is right now and what it might be next month or next year.

Understanding your costs and income will steer you clear of what might otherwise come as nasty financial surprises. You want to know what risks you are facing and, more happily, spot the great opportunities for your business to grow.

Are you on top of your cash flow? Can you estimate what will be going out and coming in over the next six months or a year? If you can't, it's time to jump on some cash flow forecasting. To help you out, check out our cash flow tips for small business owners and our stress-free cash management solutions for SMEs!

Critical though cash flow is-- and it really is vital – it isn't the only aspect of financial management that an entrepreneur needs to consider. But don't worry, we've got your back. Check out our guide to making financial management simpler.

If you’d like an opportunity to discover how Libeo can help you avoid the most common reasons for a small business to fail, just get in touch.

FAQ

How many businesses fail every year in the UK?

Latest stats suggest that almost 1 in 5 new businesses fail in the UK each year. And 20% of startups fail in their first year of business. According to Gov.uk, 502,549 new companies were incorporated in H1 2022 in the UK. Among these, 385,111 were dissolved by August 13.

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