The top ten reasons why new businesses fail

So you want to set up in business, do you?

Or you’re already trading but not doing as well as you hoped?

And although it could be far off, you’d like to know how to avoid going under?

You see, there’s a big problem with small businesses.  And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off.  Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….

… They build the business on two things (i) what they think they know and (ii) what they hope.  They don’t go out of their way to find out what they don’t know and to plan for and take action on it.

Yet it’s often the things they don’t know and the failure to plan for and act on these things that will kill the business.  And with it, their hopes and dreams, and their own personal financial position.

And that’s how it turns out for the 4 out of 10 new start-ups which fail within 2 years.  Of the survivors, most then go on to fail within the next 3 years, only one in ten are still around by year 5.

The point is you’re more likely to fail if you do what others do.

Yet with so many not making it, there’s an abundance of experiences out there just waiting to be harvested.

So why not do so, it’s free!

Here they are…

The business was started and run for the wrong reasons

Some businesses are set up and then run more like a hobby than a business.  Lifestyle businesses tend to merely exist, either doing poorly or at least not doing spectacularly, until something bad happens later to cause the wheels to come off…

I can do it all myself!

In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees.  Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment.  Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…

Not enough money

It always costs more than you’d expect to set up a business and survive the inevitable troughs later on.  And particularly at this time when the banks are ‘choosey’ who they lend to and change their approach to customers seemingly at a whim, it’s incredibly dangerous to rely on credit lines over which you don’t have full control.  Either way, the business owner didn’t properly assess how much money would be needed, where it’s best to get it from or what might happen…

Weak financial skills

Every business owner needs to understand how the business works financially.  If you don’t, you haven’t got a business, you’ve got a hobby.  If you’ve got weak financial skills, you probably also lack a strong profit motive.  While you love what you do, you’ll probably return to stereotype ‘manager’ or technician’ roles when things get bad, digging an even bigger hole for yourself rather than solving your problems.  Learning how the business ticks financially, to read and understand the figures even if it means going back to college to learn it as a new skill is critical to you surviving.  Delegate responsibility for your business’s finances and you lose all control over its destiny…

The location, the product or service is all wrong

Quite simply, the business opportunity was not fully explored, optimism blinded reality…

Lack of planning

There’s a lot of truth in the saying ‘to fail to plan is to plan to fail’.   The unexpected does happen, particularly in our increasingly complicated world!  Yet a lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid a crisis.  Planning is boring, isn’t it?  And if the world is so uncertain, why don’t we just get on with it, make it up as we go along? The reality is that just because you know things won’t work out as you plan it’s not a good reason not to plan…

Over- or under-trading

Over-trading is less of an issue at this moment in the economic cycle, but nevertheless over-confidence and inadequate control can cause terminal cash problems in fast moving businesses.  More common nowadays is what I call ‘under-trading’, where business owners adopt a strategy of merely cutting costs to deal with their problems – they do this because it’s the easiest decision and produces short term cash benefits.  However, I find that if this is all you do, you’re merely storing up much more serious problems in the medium term.  It’s simply not possible to cut yourself to greatness!…

Poor or no marketing

You wait for business to come to you, because ‘it always has done’.  This is a major danger for people who have worked for someone and have now gone on their own to do the same thing.  Often the businesses is ‘invisible’, there’s no website, no sales force, yet all businesses exist for one reason, and one reason alone, and that is to sell something…

Failing to set and follow a clear strategy for success

This is a sure recipe for failure, maybe not now but certainly for later.  Often, over time the business develops haphazardly.  One day you’ll scratch your head and wonder just how the business got to exactly where it is now – slowly strangled, very often by ‘unfair’ relationships with a major customer.   Sometimes saying no and sticking to a plan is difficult, but essential…

Inflexible business model

An inflexible business model with a high fixed cost base, while it may work in boom times, causes significant problems in the inevitable times of bust.  What’s your business model?  Tell me all about your fixed costs…

Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it.  While you still can!

Paul Brindley

Midlands Business Recovery




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One thought on “The top ten reasons why new businesses fail

  • April 25, 2012 at 9:11 am

    Very good article and one that should be read by everyone considering setting up their own business. Twenty one years ago when we set up ours, we did a lot of market research and pricing investigation. I then drew up a REALISTIC business plan which was submitted to the Bank. I was asked if they could use my model for training and advice purposes, as it turned out it was so accurate and bared all potential problems especially in relation to cash flow.
    Too many people make the mistake of taking cash from their business’ to fund a lifestyle that doesn’t yet exist, remember you’re in this for the long run and that lifestyle WILL come but not immediately!

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