5 reasons why businesses fail

Businesses fail for many reasons but here are five of the most common – and avoidable, as Adam Turnbull of BusinessesForSale.com explains.

Businesses fail for many reasons but here are five of the most common – and avoidable, as Adam Turnbull of BusinessesForSale.com explains.

It’s a sobering thought that around half of UK start-ups fail within five years.

While you can never guarantee success in business – though this is true of most worthwhile challenges in life – you can at least attempt to swerve the potholes lining the route if you know where those potholes might lie.

Of course, businesses fail for myriad reasons and in many cases multiple factors are at play. But the following five are certainly among the most common – and avoidable.

1. Decisions made before you’ve even started trading

Many of your most important business decisions will be made before you’ve even got the keys to the premises. Bad choices made at the outset could doom your venture from day one – no matter how hard you work thereafter.

The preventative cure, quite simply, is research, and lots of it. This is how you avoid fatal errors like choosing a sector in decline (imagine buying a DVD-rental store in the early years of the 21st century, for example).

Then there’s location. A vegan cafe will of course work better in young, liberal Brighton than older, conservative Eastbourne.

It’s no bad thing if your choice of sector is partly an emotional decision (indeed, decision-making is crippled without input from your brain’s emotional, ‘limbic’ centre). Your passion for what you do will sustain you through adversity.

The danger arises when the pursuit of your dream drowns out more prosaic considerations – like having the requisite skills or experience.

This naive vision of entrepreneurship was satirised in Channel Four sitcom Peep Show when self-described ‘work-shy freeloader’ Jez’s delusional dreams of a publican’s life – ‘I’ll literally get paid to go to the pub!’ – are abruptly deflated by flatmate and realist Mark: ‘It won’t be quite like being paid just to go to the pub, because you’ll be doing all the pub stuff: the barrels, the tubes, the debit card authorisations.’

2. Liquidity

Few things offend our sense of justice more than a popular business sent under by tardy or downright unscrupulous clients. Small businesses are owed an estimated £26.8 billion in late payments, according to BACS, and delayed payment can, and does, put good businesses into liquidation.

But you needn’t be helpless in the face of slow payers. There are several simple steps you can take: make payment terms crystal clear; invoice promptly; issue periodic, automated reminders; and establish and maintain contact with a suitably senior person at the debtor company.

If that doesn’t work then it’s time to get tough: charge interest and collection fees or use debt collection agencies. Invoice financing is another option.

3. Eggs and baskets

Imagine you’ve got £50 to bet on a roulette table. You’re more likely to emerge with any winnings at all if you place five £10 bets on five separate spins of the wheel than by putting the whole lot on black.

And the ‘all in’ approach becomes riskier the longer the odds. This is why diversification of income streams is particularly attractive in sectors where demand is volatile or seasonal.

Take farming, which is hostage to weather patterns and fluctuating international commodity prices. A farm that grows just a single crop can be imperilled by a single bad domestic harvest or a bumper harvest overseas that sparks a flood of cheap imports.

In this turbulent context it’s easy to see why many farmers diversify their income, and not just to other crops or livestock. Some set aside land for caravans, erect marquees for weddings or (like Worthy Farm’s Michael Eavis) lease out land to event organisers.

4. Expanding too fast

But diversification can go wrong too. Often achieved through business acquisitions, diversification works best when new services dovetail well with the business’s existing operation – like a bar that starts serving food, for instance.

Diversification is less cost-effective if existing premises, equipment and staff are not well equipped to deliver them.

Another danger is investing in new services or outlets to the detriment of your core operation, which can alienate loyal customers. Grow too fast and you run the risk of making rash recruitment decisions as you struggle to fill new posts, neglecting existing customers in pursuit of new ones or leaving yourself over-exposed if recession hits – which brings us to our final point.

5.Recession

In 1997 the then Chancellor Gordon Brown hubristically forecast the end of boom and bust. Nineteen years and a massive financial crisis later, no one is quite so complacent any more.

Some sectors are more vulnerable to a contraction in GDP and drop in consumer spending than others, notably construction, retail and hospitality.

An obvious way to reduce your potential exposure is to start or buy a recession-proof business, such as those selling non-discretionary goods, like food retailers, or businesses at the budget end of the consumer market. Some businesses, like cheque-cashing shops, actually thrive during downturns.

The recovery can actually be the most dangerous time: the rate of business failure is usually higher than at the recession’s peak. Having made cutbacks to stay afloat during the downturn, businesses then hire more staff and replenish stock when orders recover. A time lag between investing and being paid can then put real strain on cash flow.

Not that recession is always a disaster. Lean, well-run businesses can actually emerge from downturns with greater market share after the demise of less efficient competitors.

Businesses that fall prey to the first four problems are nevertheless vulnerable when recession hits – something worth remembering with some experts issuing warnings of another impending financial crash.

Adam Turnbull is managing editor of BusinessesForSale.com, the market-leading directory of business opportunities from Dynamis. Adam manages content across all titles in the Dynamis stable, as well as well as being a regular contributor to other industry publications, both print and online.

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