19th December 2018

Why small businesses fail and how to avoid it

It’s no secret that the survival of small business can be challenging for entrepreneurs in the UK — only four in ten businesses survive past the five year mark of running the business. Businesses fail from making continuous mistakes which lead to the collapse of their business, so knowing the causes of business failure is key to eluding those factors and focusing on success. A plan to survive should therefore be accompanied by short and long term goals and objectives to keep you on track.

Small businesses sometimes start with their backs against the wall so they need to work extra hard, carry out sufficient research and undertake rigorous planning in order to stand a chance of success. Here are some major mistakes that small businesses make that ultimately result in their failure, and how to avoid making them.

Funding and cash flow problems

One of the biggest reasons businesses cease to trade is because they struggle with their finances. It’s normal to face a squeeze when it comes to cash flow from time to time and this is can be because of factors outside of your control. For example, the late payment culture may have an impact on your business, whereby not being paid on time by bigger companies effects your ability to meet your own payments. However, planning is key, and you need to make sure that you have the funds to support your business through low cash periods. Although this may mean you need to secure additional funding for your business, you cannot simply avoid planning your finances and just hope for the best. To avoid a disaster you should draw up a budget, which you regularly review and add to. Get an estimate of how much extra cash you could access with our online funding calculator.

Lack of credit control

Businesses that lack a robust credit control process can face problems when invoices are paid late or their customers default. Unfortunately most businesses don’t think about setting up an end-to-end credit control process until it’s too late and they've already run into problems with late payment. Be proactive and take the stress out of chasing payments with services like full factoring invoice finance or Know-it's automated credit control. Put credit control into the hands of the experts and focus on what you do best, running your business.

Inefficient leadership

You don’t need to have great leadership skills when you first start your business, however some natural entrepreneurial flare needs to be present. You can always hone skills and build on them, but if you fail to do so then it could have a severe impact on your business. Being an inefficient leader can cause many problems, which will lead to the death of the business. If you are not managing your finances, employees etc. then it will eventually take its toll on your business. To avoid bad leadership destroying your business, listen to feedback and take it on board in order to improve. A good leader is always open to learning. You need to find the balance between making decisions and sticking to them, and listening to others, taking feedback and implementing changes.

Poor planning

Businesses need a plan to follow in order to work, whether that is a cash flow plan, a finance plan, an expansion plan or the goals and objectives of the business. If you fail to plan then you are essentially planning to fail. Therefore, invest time in planning the future of your business, and also consider planning an exit strategy. You need to find a balance between focusing on the present and looking at the future. Make sure you set both short and long term goals and devise a plan, highlighting how you will achieve them.

Inability to adapt

When businesses are stuck in the past and refuse to grow and adapt with the times, they can and will likely die. You need to keep on top of trends and make changes when suited; this doesn’t mean that you jump on every trend, but you should adapt and grow with the changing consumer markets. For example, some things that most businesses should invest in right now are an online presence, a mobile friendly site and being active on social media. Keeping an eye on consumer trends to see how the public are behaving is so important in order to keep up. If you aren’t moving along with the times you will get left behind.

Lack of research

You need to make sure to carry out sufficient market research before you have even considered opening your business. You must make sure that there is enough of a demand for your product and service and if there really is a gap in the market for you. If you want to open a coffee shop down a high street that has five others, you will be setting yourself up for a huge challenge. That is not to say that some healthy competition is a terrible thing, however you need to have strategies in place to come out on top against your competitors. You also need to consider your location. You might have a great unique idea, but failing to carry out research in a particular area can also cause issues. Make sure that the location of your business is the prime option for you to have a successful, thriving business.

These are some of the most common reasons that lead to failure of small businesses, and now that you know them you can make sure to avoid them.

At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant estimate for the amount of funding you could access with our finance calculator. Products include invoice discounting and factoring that can boost your cashflow and give you access to a dedicated credit control team.

Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.