Starting a new business can be exciting; the realisation of a dream. But for many business owners, that dream can be shattered quickly. 20% of new businesses fail in their first year and around 60% won’t make the end of year 3. Scary huh?
There are many different reasons why a business doesn’t last, and some of these may be external factors beyond your control. But all too often, the cause of business failure is staring back at you from the mirror.
Here, we’ll take a look at the main internal causes of business failure. Knowledge is power, and these insights might help you to avoid them.
Top 5 Internal Causes of Business Failure
1. Poor Cashflow Management
Cashflow is central to your business. It’s the net balance of cash moving in and out of your business. It’s how you pay your liabilities and stay in profit. But negative cash flow is the primary reason small businesses fail.
What are the main cash flow problems?
Planning can be the difference between make or break. If your cash outflow is higher than your cash inflow, you’ll have a cash shortage. This could simply be down to timing. Say a client is late paying their invoice and your outgoings happen before they make payment. The result is a cash flow problem.
In essence, poor financial management, and lack of future thinking, can lead to cash flow problems and bad debts. Efficient financial planning can help you to stay on top of cash flow management. Forecasting and smart financial management will help to ensure your business has adequate working capital to pay liabilities. A simple strategy like speedy invoicing can be all it takes to get enough cash coming in before payments go out.
Discover my 10 simple solutions to cash flow problems in your business
2. Poor Management
How do poor management decisions contribute to business failure?
You may be an expert builder, but how effective are you at leading a construction company? All too often, a small business owner has the industry expertise but not the leadership and management skills needed to run a successful business.
Business leaders must be able to plan, identify and solve problems efficiently. The buck stops with the business owner or management team, so they need to resolve issues before they escalate. That could be financial issues or staffing, for example. Leaders need to provide direction, and that means strategic thinking rather than spending all their time on short-term, day-to-day activities.
Good leaders make sure their staff and investors remain happy, and that their product or service is of suitable quality and delivers consistently. Without that, your team will lack motivation and care about their work.
3. Poor Business Planning
Have you heard the saying, “failing to plan is planning to fail”? Well, it’s true. I’m a huge fan of a plan. It really is the most effective tool to drive business success. A good business plan will explain clearly what the company needs to do to achieve its business aims.
Keep your eye on the ball. As a business owner, you need to know what’s happening in your company. You need to truly understand your business model, your income vs expenditure. Have realistic expectations about performance and working capital. A few good tips:
- Set SMART goals – make sure you monitor and track them regularly
- Keep accurate financial records – get to grips with your monetary position
- Factor in all business needs – from stock levels to supply chain, investment to internal processes.
But remember that a business plan isn’t set in stone. It needs to be agile, so that you can evolve and pivot over time as changes happen. For example, you may need to diversify your customer base as the market changes.
Here’s how to write a business plan in 6 easy steps
4. Poor Market Research
Another aspect of business planning is conducting robust market research. Get to know the competitive landscape and identify your target audience.
It’s vital to remember that your “customer is king.” Put them front and centre of every decision you make. Be sure that you’re meeting customer needs. Does your offering solve a problem for them? Putting a product or service to market that doesn’t meet customer needs, demands or expectations is a waste of time, resources and money. Do your homework before you start investing!
5. Overtrading
It’s easy to get enthusiastic about your business, especially when you’re passionate about it. But overtrading, or growing a business too quickly, is one of the most common internal causes of business failure. If you expand your company without the resources to back it up, you can jeopardise your business’ finances.
Again, it’s important to make a realistic business plan and plot your growth at a sustainable rate. Don’t run before you can walk. Monitor your finances and KPIs to check you’re keeping on track.
Check out these business planning essentials
External Causes of Business Failure
Whilst we’re focussing primarily on internal causes of business failure, it’s important to note that there can be unexpected external factors. Over the past few years, there have been huge challenges to face. We’ve seen a financial crisis, global pandemic, Brexit, soaring interest rates, natural disasters (floods, fires, hurricanes and more). They’ve tested even the most well-established businesses and many are still reeling from their effects.
These can be largely unpredictable, but having contingency or emergency plans can provide a level of protection for your business.
Don’t Become One of the Statistics
You may have an amazing business idea, and the drive to thrive at entrepreneurship, but that’s not enough to achieve business success. With such a high failure rate amongst start ups, entrepreneurship can feel particularly daunting. Avoid taking a wrong turn and leading your business towards failure by taking the time to plan and think strategically.
I’m here to help with that, and to keep you on track. Let’s chat about working together on your business plan
“With Phil’s brilliant workshop programs, we now have the right tools to help the business run more efficiently and to help overcome some of the most common business challenges.”
Sam Keehn – Quaddus Creative
