Ten reasons why businesses fail

Launching your own business can be exciting, rewarding and liberating – but it’s not for the fainthearted.
After all, if it was easy, we would all be doing it. So, before you take the leap and head out on your own business adventure, there are plenty of things to consider.

The first is that new businesses fail in large numbers year in, year out. This is set out in stark detail in latest figures from the Office for National Statistics, which reveal that business failures went up from 283,000 in 2015 to 328,000 in 2016, 11.6 per cent of active companies. This was more marked in London, with a 14 per cent failure rate.

The finance and insurance sector had the highest business failure rate at 17.0 per cent in 2016, with business support and administration at 15.4 per cent.

If you are committed to realizing your dream, that won’t put you off – and to avoid becoming another statistical casualty, it’s important to understand why businesses fail. You can never predict the future and billionaire tycoon Warren Buffett summed that up when he said: “In the business world, the rear-view mirror is always clearer than the windshield.”

But you will increase your chances of success by learning from the mistakes of those who failed and getting off on the front foot. A good starting point is to use a company formations to do all the set-up work for your new business, leaving you to concentrate on the challenges ahead.
Here are ten common reasons why companies fail:

Poor cash flow is a killer

This is the death of many otherwise healthy businesses. It’s no good having a full order book if you cannot get the cash in to pay your suppliers and lenders, not to mention the wages of your staff. Keeping on top of outstanding invoices and having a plan in place to keep it flowing in is crucial. That means what is known as ‘positive cash flow’ should be right at the top of any entrepreneur’s priority list.

It is the lifeblood of small and medium enterprises and is critical to sustaining and growing a business. So, remember the old saying: ‘Turnover is vanity, profit is sanity and cash flow is reality!’

No plan means no future

If you don’t have a plan you won’t have a business in the long run. It’s simply not possible to ‘wing it’ and make a success of your new venture. You will need a detailed plan setting out objectives for the months and even years ahead. Once that is done, it’s important to share it with every member of your team to get ‘buy-in’, feedback and suggestions from the ‘shop floor.’ Remember too that no plan should be set in stone. It should remain flexible and be adjusted as you go along in response to changes in your marketplace. Having the metrics in place to measure its success – or lack of it – is another must.

Look after your customers

Fail to look after your customers and you are preparing to fail. Good customer service can literally be the making of a business. That means listening to them, dealing with complaints promptly, conducting regular research and generally over-delivering on your promises. Delivering value to customers makes excellent business sense, for a number of reasons

  • It’s cheaper to keep existing customers than chase new ones.
  • It builds your reputation – every unhappy customer will tell 10-15 people about their experience, according to McKinsey.
  • It reduces churn – a report by Accenture found that the key reason customers leave is poor service, more so than pricing.
  • It allows you to stand out from the competition – if two companies offer the same product or service, the one that looks after its customers best will usually prevail.
  • It boosts the bottom line – it stands to reason that happy, loyal customers will return again and again to spend their hard-earned cash with you.
  • Good customer feedback from regular surveys can be used as a marketing tool

Relying on key clients is risky

Who are your biggest clients? What would happen if you lost one or more of them? By all means pop the champagne corks when you get a big customer, but then go out and get more. Businesses that rely heavily on a small number of customers are highly vulnerable – if one or more of them pulls the plug and the business fails it means their customer base is not deep or diverse enough. Even if they stay with you, what happens in the event that the customer goes bust? There is no room for complacency – you must never rest on your laurels. Just ask any failed businessman or woman who did. Always have a Plan B and make ongoing business development a core part of the daily routine.

Keep control of the costs

Just as keeping on top of the cash coming in is vital, so is maintaining a tight grip on what you spend, even when business is booming. Keeping a close eye on your outgoings should be a daily reflex action and the importance of it should be instilled at all levels without making people feel as if they are working for Scrooge! Once you let your costs run away, getting them back under control is an uphill struggle and will involve many painful decisions, which often involve people’s jobs. Better to keep things tight and not only will you be better place to copy with a downturn, but you will also have the confidence to be generous when it is merited, such as paying for the staff Christmas party.

The value of leadership

Former United States President Ronald Reagan once said: “The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.”
The true leader sets the tempo, the tone and the objectives. He or she also has a vision and can inspire others to share it and once that’s done, lets people get on with their jobs while they focus on the bigger picture. Micro-managers are not good leaders! There are key leadership traits and the more of these you have, the better. They include:

  • Honesty
  • Transparency
  • Confidence
  • Patience
  • Decisiveness
  • An open mind
  • Positivity
  • Generosity

Building a strong team

You might be a genius, but in the long run you’re only as good as the team you have around you. Recruiting people with the right skills, potential and attitudes is an important first step, but it doesn’t end there. They need to be motivated, stimulated and rewarded if they are to flourish and stay with you. Avoid creating a ‘them and us’ culture and adopt an open management style instead. Give regular constructive feedback, adopt flexible working practices, celebrate successes, arrange social events and deal with any problems promptly and fairly and you will be well on the way to building a happy and productive work environment that has a positive impact on the bottom line and keeps staff turnover low.

Robust technology solutions

Like it or not, technology is at the heart of every business and it’s vital to get your infrastructure right. The systems you employ in your business can be crucial to your success, or contribute to your failure. Good technology increases productivity and improves cash flow and profitability. It also protects your business from breaches of security and loss of valuable data and all the disruption and cost that brings. That means a cost-efficient, future-proofed plan for your business systems covering CRM, finance and all other departments should be one of the first things you draw up before embarking on your new venture.

Marketing is not a luxury

The definition of marketing is ‘The action or business of promoting and selling products or services, including market research and advertising.’ Don’t let anyone tell you this is a luxury. Your new business needs an excellent, measurable marketing and communications plan and you ignore it at your peril. Merely opening for business and building a website does not count as effective marketing! Nor does the opposite approach, a scattergun approach where you are marketing yourself on every available platform. No matter what business you are in, you need to do your research and concentrate on the platforms that will put you in front of new and existing customers. If this is not your area of expertise, employ someone to do it for you, or if it makes more financial sense, bring in outside contractors to work with you on your marketing plan. Find out more at The Marketing Society.

Too much too soon

Your business can be a runaway success, with everyone wanting your product or service and still become a casualty. Rapid growth and over expansion are common contributors to business failures, with even the biggest concerns coming a cropper. This is often caused by initial success mixed with over confidence or a desire to capitalize on high demand. The result is that companies often expand at a rapid rate, borrowing as they go and leaving themselves highly vulnerable to market changes. Others launch before they are ready and then cannot cope with demand, while ordering too much stock can also take you down if you cannot shift it quickly. Far better to grow organically and in a carefully planned and researched way than let a corporate rush of blood to the head take you over the edge.

Last but not least, you will never succeed if you cannot deal with failure. Some of the world’s biggest business names have suffered setbacks along the way. If things do go wrong, don’t give up. Dust yourself off, learn the lessons and go for it again!