Accounting Small Business Advice

10 Reasons Why Businesses Fail

6 May 2016

Fifty percent of new businesses go bust in the first five years. The first thing you should do before starting your own company is understand the common pitfalls so you can avoid them.

1. Ridiculous reasons

Passion is important, but can’t be your only reason for going into business. Is there a proven revenue stream for your product? The desire to make money is essential, but are you prepared for meagre early years, and are you knowledgeable enough to make your idea work? Do you really want to run a business, or do you just want more flexible working terms?

2. Monstrous marketing

If no one knows you exist, how can they buy your product? If you don’t know marketing, hire a freelancer or do your research and get on social media. You need a professional image across your website, social media and even printed documents. No business can exist these days without SEO and digital marketing.

3. USP-free

Good marketing is not just choosing a logo, and shouting as loudly as possible. You need a Unique Selling Point to make you stand out. Complete originality is rare, so you need something unusual in your product, pricing, quality, ethos, focus, or character.

4. Mediocre management

Every day, businesses are destroyed by a lack of unity, general confusion, and abysmal morale. Are you diplomatic enough to settle disagreements calmly and discretely? Can you clearly communicate your goals and each employee’s responsibilities? Can you delegate, or do you like to micromanage, even in areas where you have no experience?

5. Patronising patrons

You can just tell customers what they want and they’ll buy it, right? Hmm. Don’t assume you are your own core market. Do your research, and talk to your customers about how you can improve. Keep on top of trends within your demographic. Some customers will be willing to fill in surveys, and your family, friends, and those of your employees can be strong-armed into it.

6. Business plan shmizness plan

You should have thought through every aspect of your business before forging ahead. Writing a good business plan means you have to cover every angle. You may think you know your industry inside out, but if you don’t have a solid business plan, you’re just winging it.

7. Frightful financials

Business finances are more complicated than income minus expenses. Have you any experience managing finances? Do you understand the tax system? Have you got the funds to fill a gap left by late payments? So many businesses flop because they tie their P&L sheet in knots, think they’re making money, but aren’t; fall behind on payments; or simply didn’t get enough funding in the first place. You can handle basic bookkeeping, but most would benefit from support managing things like share structures, growth strategy, and tax planning.

8. Expansion explosion

Growth is the key measure of success, yet you can grow too quickly. Without realising it, your costs exceed your income, and with no reserve cash, you’re in trouble. Perhaps you go for the fancy office and hand out pay rises a tad early. Or maybe you don’t have the resources to handle a sudden increase in demand.

9. Pathetic pricing

Pricing is your most important marketing tool. Too high and you’ll frighten customers away. But perhaps more common is pricing too low; you may be selling, but your image is damaged and your margins are laughable. Have faith in your product, research perceptions of your product and do competitor comparisons.

10. Customer crisis

It sounds pretty obvious, but if you haven’t got any customers, you’ll go out of business. In the beginning, it’s easy to focus on the pitfalls outlined above, but the most important thing is how you’re going to get your customers in the door from the get-go. Can you test your product first and grow a list of leads? What about freelancing on the side, an eBay shop, a pop-up, or a stall at a market?

Running a business is hard work. There’s no secret formula, or set path to success. But if you take all of these common stumbling blocks into account and plan ahead, you’re giving yourself the best chance of survival, and hopefully a thriving business.