Why Do Small Businesses Fail – Part 1

The more I think about this question (Why Do Small Businesses Fail?), the bigger it becomes. In fact, this question is so big that it’s motivated me to collaborate with the Rainmakers Club and write an entire series of articles on the subject. This is the first in a series that will be published over the next few months.

My objective is primarily to help the start-up, micro, and small-business sector to learn from the combined experience of this exciting collaboration between my accountancy services and the Rainmakers Club – both equally committed to the creation of sustainable success for our clients and members through advice, support, and education.

The big five

So, why do so many small businesses fail? Answers and opinions can vary greatly, depending on who you ask and where you look for the answer. But based on comprehensive research, both on- and offline, the reasons most commonly given for the failure of small businesses are:

• Lack of capital
• Poor cashflow management
• Lack of sales
• Poor business model
• Lack of planning and/or research

In a recent survey, undertaken by the Rainmakers Club, and targeting small, Norfolk-based businesses, over 85% of those questioned strongly agreed with these top five reasons for business failure. Many of the alternative answers to this question, which you can find online, should be taken with a pinch of salt, as they appear to be weighed in favour of an underlying agenda – predominantly to sell some version of sales-funnel technology.

Although we fundamentally agree that these top five are contributors to business failure, there’s more to the story than you might realise. Before we look at this, it’s worth just paying some attention to these contributory factors; but with caution, because as this series develops, we’ll demonstrate to you that in fact these are nothing more than the physical symptoms of a far more important core reason; a reason that’s often hidden under the surface, where the true root cause can be found.

All of these symptoms are related to each other and can indicate pending failure as a group, partial group, or even on an individual basis. Failure of a business of any size or stage of development does not, and will not, happen overnight. It happens very subtly at first, and in many cases without giving any indication to those working on, or in, the business, of what’s bound to happen.

The passage of failure

Failure can spread slowly, like osmosis. The rot doesn’t differentiate, but spreads throughout the business. A failing business dies very slowly.

At the beginning, the deterioration often goes unnoticed. Later, when the end comes, it often appears to happen quickly and without warning. This passage of failure is a common characteristic in the eyes of those who have first-hand experience of a business failure.

We believe that to attribute business failure to one or more of the top five mentioned in this article – or to any of the other factors related to business process – is misleading and unhelpful to enterprising and entrepreneurial people who are thinking of starting, or who are engaged in the development of, a small business.

We say this because it’s a myth and serves to mislead the unenlightened. The true reason behind failure, once understood, can actually protect you from the majority of actions, or lack of action, that can lead to failure.

Our next article in this series asks the question, ‘Why do small businesses fail?’ We’ll tell you the truth behind business failure and explore the solutions available to everyone, if they simply take the time to learn.