3 Reasons why some new businesses fail

by | Sep 28, 2021 | New business

It is widely publicised that a high proportion of new business fail within the first 3 years, with some reports suggesting it could be as high as 3 in 5!  So here are 3 common reasons why new businesses fail so you can learn from their mistakes.

  1. Little expertise or knowledge of the business sector

It is surprising the number of people that start a business in a sector that they know little about and are then shocked when the business fails.  It is important to have knowledge of your business process, who your main competitors will be, any seasonality, trends, is the sector growing or declining and important sector specific legal matters, to name just a few.  You goal should be to minimise the unexpected, considering all potential opportunities and risks.   Too many businesses fail by simply not understanding the market that they are in!  The more you know the greater your chance of success.

  1. No or poor business plan

Benjamin Franklin famously said, “If you fail to plan, you are planning to fail!”.   A business plan should never just be an exercise to help obtain a grant or bank loan.  It is recommended that every business has a business plan, so you know which direction that you are moving in and you have markers that alert you when you are deviating from the plan.  Short term plans should be detailed with clear financial goals and objectives.  As you move into the medium and long term, owing to the uncertainty of time, naturally the plan will become more strategic than detailed goals. But none the less a plan should look to your ultimate goal, maybe disposal, floatation or passing it on to a family member.  For most business a 30-year business plan would be the norm, but many Japanese companies plan for 100 years!  It is probably no coincidence how Japanese companies’ succeed on a global scale, especially in the electronics and automotive sectors.

  1. Growing too quickly

This is a reason that many new businesses fail and is widely overlooked.  People seem to have the mantra all growth is good and means my business is thriving, so how can that cause business failure?  The problem is planned managed business growth is good, whilst blind unmonitored growth is bad.  As a business grows its need for resources increases. One of the most daunting challenges can often come as a business grows and moves to employing people other than its owner.  How easy will it be to find people with the same knowledge and expertise?  Will customer service decline? And, perhaps the most important change as the owner transitions from the worker to the manager.

There of course other potential problems such as availability or raw material and geographical sales areas.  However, probably the biggest challenge of all is the financial resources.  Growth requires careful financial planning and evaluation.  Generally, the rule of thumb is as turnover increases so will the working capital requirements.  Using an example to explain this, imagine a company manufacturing garden sheds.  Typically, they will have to pay employee wages, material costs and other overheads perhaps many weeks before they get paid by their customers.  As they grow it is this need for increased working capital that needs to be carefully managed or they could find themselves in financial difficulties.

If you have recently started or planning to start a business, we can support and guide you through the maze.

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The information provided is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from an appropriate professional before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties. The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.

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