Common causes of business failure and how to avoid them

When starting a new business, it can be difficult to know exactly what you should and shouldn’t be doing, it all seems a bit trail and error. But can you take the risk? You don’t need to with the following article. It shares with you ten common reasons SMEs fail; so you know exactly what to avoid.


Ten reasons why SME’s fail

Starting a small business is always going to be a risk. Yet without entrepreneurs starting up small businesses, we would not have any of the big brand names that we have today. As insolvency practitioners, we see a number of startups who have made the wrong decisions. The purpose of this article is to provide details of where we frequently see things go wrong so you can hope to avoid making the same mistakes.

Private piggy bank

Unfortunately one of the reasons we see for the failure of businesses on many occasions is directors failing to distinguish between company money and their own money. Too often we see day to day living expenses being drawn from the company account or simply large lumps of cash being taken out with no clear reason other than it was there.

As a director you are entitled to be remunerated by the company, however, this must be:

  • Commensurate to the size, nature and earnings of the company.
  • Limiting direct spending from the company account to business expenditure.
  • Drawn as a taxable salary or shareholder dividends where reserves allow for this.

The nature of a company is that it holds limited liability, however, if funds are taken improperly from the company, not only can this cause solvency issues within the company, but will also allow an insolvency practitioner to lift the corporate veil and pursue you personally for these balances.

Overexpansion

A lot of people are confused as to what overexpansion means. How can my business be too big? A successful business is not necessarily measured by how quickly the business grows. Ideally, your focus should be on steady organic growth. This is not something you can force by rapidly expanding your team and incurring numerous costs.

The best way to monitor growth is by measuring whether you are meeting customer deadlines and whether staff are able to manage their workload. As they are reaching their limit, but before they become a problem is the best time to expand. Otherwise, you are left with numerous excessive costs which can lead to the insolvency of your business if they are not dealt with quickly.

Poor Management

No one likes to be told this, but the hard truth is that businesses can fail due to your own management skills. To err is human, however it is important to know your own limitations. Also as a young manager new to business, you may want to be everyone’s friend. Inversely you may be the type of manager who runs the office with an iron fist. Again neither of these extremes will promote productivity amongst your employees and you need to find the correct balance.

A good manager should have the following qualities:

  • A good leader.
  • Firm and flexible with employees in a way that promotes productivity.
  • Skilful in hiring and training staff.
  • Able to delegate effectively.
  • Strategic and realistic in your business planning.
  • Able to deal with rapidly changing markets.
  • Able to manage your own time and responsibilities effectively.

An effective way to deal with this is to find some quiet time for self-reflection and honesty in writing out your strengths and weaknesses. Once you have done this you have three options to deal with your weaknesses:

  • Take positive action to develop your own skills.
  • Hire employees or form partnerships with people who are able to fill the skills gap.
  • Contract out the work to professional advisors.

Poor Planning

This partially ties in with poor management but is significant enough of a problem to warrant further explanation. Unlike some of Del Boy’s “best” ideas, a business can’t be started up the next day after a chat in the Nag’s Head. There are multiple considerations which need to be taken into account and should be put into a fairly comprehensive business plan.

A good business plan should:

  • Set out your goals and aspirations for the business.
  • Review the demand in your target market.
  • Sensitivity or risk analysis.
  • Financial projections for the first 2-3 years of trading.
  • Set out any production or delivery process.
  • Staffing requirements.
  • Marketing and promotion plan.
  • Product and pricing details.

If you are seeking external funding for your business this will most likely be a requirement, which brings us on to our next topic.

Insufficient capital

When starting a new business it is important to ensure you have sufficient initial funding to reach the point where your business is making a profit. This is commonly known as knowing your burn rate. Underestimating the level of capital you need can mean your business has to close before it can even get started.

Careful planning is needed before you even get started on this and you should take the following basic steps to evaluate the level of capital required:

  • Set out the one-off costs you will incur in setting up.
  • Add to this the monthly recurring expenses of the business, (which should include a contingency).
  • Review your business plan as to the point you expect to be market fit.

This figure should give you an idea of the amount of capital that will need to be introduced into the business in to give you time to bring your business into the black.

Lack of Media

In the 21st century, consumers expect businesses to have a well-designed website and social media outreach. Not only is this an excellent low-cost marketing tool, but there is also a general distrust of businesses who have poorly designed websites or no internet presence at all.

In Q1 of 2017, it was confirmed that 91% of the UK population are Internet users to some degree according to the ONS. Yet still, 17% of SMEs have no internet presence whatsoever and 71% confirming they do not feel able to handle online clients. This alienates an enormous amount of the potential market no matter what type of business you run, particularly the millennial generation who for some reason don’t like talking to people directly.

As a bare minimum, you should have a website which:

  • Looks professional and is easy to navigate.
  • Has contact details for the business through various mediums.
  • Clearly provides information on the product or service you are providing.
  • Promotes your business suggesting why customers should choose you over your competitors.

Setting up your website as an e-commerce site is not necessarily a requirement, but if a bit of market research recommends it, then this could also be a huge asset to your business.

Location

Whilst for many businesses, due to the creation of the internet, location will have no effect on them other than how easy it is for staff to nip out for a sandwich at lunchtime, there are still many industries which need to have the right level of footfall. To establish a good location for your business you need to consider:

  • Your target market and the density of this in the local population.
  • Whether people need to be able to park outside the premises for heavy goods etc.
  • Who are your competitors and where are they located.
  • Whether there are any local growth funds in the area.
  • Any planning applications which are currently outstanding in the area (particularly if you are at risk of disruption from a compulsory purchase order).

The only other alternative is to have a product so good that customers are willing to travel for it. A good example of this is countryside pubs. Whilst they may be in the middle of nowhere, you will usually find that the food there is excellent to draw in customers.

Mismanagement of tax affairs

If there is one thing you need to take the time to get right it is your relationship with HM Revenue & Customs. Due to increased pressure from the government, over the years they have become far stricter in how they deal with businesses. While almost all businesses will need to be registered for VAT, PAYE/NI and corporation tax there are also a number of indirect taxes you may need to manage and pay which as less well known:

  • Aggregates levy
  • Air Passenger duty
  • Alcohol duties
  • Betting, gaming and lottery duties.
  • Construction industry scheme.
  • Climate Change Levy and Carbon Price Floor
  • Hydrocarbon oils duties
  • Insurance Premium Tax (IPT)
  • Landfill Tax
  • Tobacco duties

These taxes are all industry specific and you should seek professional advice from your accountant if you believe any of them may apply to you. While the tax system may seem complex there are 3 basic rules to dealing with this properly:

  • Diarise your filing dates and ensure all returns are filed on time.
  • Make provisions within your cash flow for payment to HM Revenue & Customs.
  • Ensure all payments are made on time to avoid automatic penalties.

Remember that not only can failure to deal with your tax affairs lead to your company becoming insolvent, trading on crown debt is the number 1 reason for disqualification as a director. This can now result in a financial penalty falling upon you personally as deemed by the court.

Not listening to customer feedback

Or in some cases listening to customers too much. Through the rise of social media and otherwise customer feedback is even more public than it was before with the ability to review any kind of business now available.

This will however also mean filtering out between people with genuine concerns and people who are just trying to get a free lunch. In all cases responding to complaints appropriately should be a cornerstone of your business.

Where someone has had a genuine problem, if you are able to fix things for them quickly and with little inconvenience, this can be an excellent marketing tool as they will then go on to tell others about the service they received. Also, the genuine ones will highlight where you can make improvements to your business to avoid future complaints or even give you ideas you never had yourself.

It is also necessary to deal with the complaints you feel are not genuine and you need to be ready to fight your corner. There is partially now a culture of people threatening to give you a bad review unless you give them some kind of benefit. In these cases keep details of the actual incident and be ready to provide a comprehensive response and your own version of events. Dealing with this head on can be just as good a marketing tool, with some of the best responses going viral, and a true picture of the facts will often embarrass people into removing bad reviews.

Here are some examples of people dealing effectively with poor reviews reviewtrackers.com/respond-negative-reviews

The Internet

Finally, the internet is full of interesting information that can cause a distraction, sometimes too much of a distraction. So now that you’ve read this highly informative and helpful article, stop wasting time reading articles online, get back to work and make your business a success.

If you wish to continue spending time reading articles rather than doing this please do not hesitate to contact one of our business rescue experts for some free impartial advice.

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