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Top 4 reasons small businesses fail

by Raquel
| May 24, 2021
Reading time: 4 minutes
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As a business owner, there’s nothing more terrifying than the thought of your business failing. After all, you have poured in all your time, effort, and knowledge. You may have noticed that a start-up at your co-working space has vanished into thin air, or your friend’s quirky pottery cafe had to close… but you never think it could happen to you.

But the hard reality is that 60% of new businesses fail in the first three years. Considering failure is uncomfortable, but it’s better to know the facts and avoid mistakes before it’s too late. We have compiled the top four reasons small businesses fail, so you can know what not to do.

1. Unclear business plan

Perhaps you have the best business idea in the world, but without a plan to execute it you won’t get very far.

A business plan is a formal document outlining your business’s goals, the methods to reach them, and the time frames to achieve them. Having one will help you identify areas you may be neglecting, provide a roadmap for growth, and future-proof your business.

So, how do you get started? According to Start Up Donut’s essential guide, endorsed by the UK Government, a business plan should cover these key areas:

  • Business and products
  • Market and competition
  • Marketing and sales
  • Management and personnel
  • Operations
  • Financial performance
  • SWOT analysis

Make sure that you cover them all, even at a basic level. Include detailed information (such as market research or financial forecasts) in separate appendices. Remember: this document serves mainly to help your business – so make it for you, not to impress!

To check that your plan has the crucial clarity it needs, you can do an ‘elevator pitch’ exercise, where you have 30 seconds to explain your business to get someone interested. For example:

“I’m a virtual PA and I help other small businesses get on top of their admin. By outsourcing their administrative tasks to me, they have more time to spend on marketing and product development. Because I trained as a legal secretary, I can handle a wide range of complex administrative tasks, and working remotely means I can offer my services at a much lower price than agencies can.”

Top tip: If you can’t explain your business clearly, you’re probably overcomplicating things. In simple terms, think about what your business does, who it helps, and why it has the edge.

2. Not understanding your customers

Naturally, you’re passionate about your product or service offering, and this passion will help propel your business forward. But you have to remember that you’re on a different side of the fence to your customers. So, you need to see your offering from their point of view and ask yourself if you are truly addressing your customers’ needs.

Without understanding your customer, it’s difficult to market your product. And depending on what industry you’re in, customer needs can change rapidly, so the product or service you started with may quickly become outdated. You need to be able to predict and respond to these needs, or you risk being left behind by the pace of change.

To avoid this, you need to stay ahead of the curve. But how can you do this?

  • First, read customer reviews and complaints carefully. If these aren’t coming in organically, ask your customers as you are serving them in person, or if you are an online business you can actively seek feedback by running a survey. An idea that tends to help you receive more responses is to incentivise your customers, for example with a sweepstake or by giving them rewards that bring them back to your business.
  • Next, build your customer personas based on feedback and research.
  • Finally, keep on top of the consumer trends in your industry. You can do this by networking, subscribing to relevant newsletters, or attending webinars and conferences.

Top tip: No information is too much – the more you can absorb and assimilate your target market, the better.

3. No online presence 

If your company has historically operated based on word-of-mouth of physical footfall, creating an online presence can sound daunting and even unnecessary. But without an online presence, you are failing to tap into a whole new market. If the majority of your customers move fully online, and all your competitors have a strong online presence, you may lose out and your business will suffer.

Start small at first. You can add a free business listing on Google, which even has a free course on this. With a Google listing, people will be able to search for your business, see and leave reviews, find your address, and get in touch. You can also create a Facebook business page and Twitter and Instagram profiles to interact with customers. Don’t forget you don’t need to do them all! Just find where your customers are and make yourself available there.

The next step to a strong online presence is a website. The good news is that for freelancers and small businesses it’s never been easier to set one up. You need to purchase a web domain but you can start small by using an off-the-shelf website building software such as Wix, WordPress, or Squarespace which help you create a website from templates and take care of all the technical stuff for you. 

If you have more budget, you may also want to consider hiring a web developer. This is a more expensive option, but having a bespoke website will give you flexibility to match your brand view. 

Top tip: If you’re struggling for inspiration, see what your competitors are up to. Which platforms are they using? How are they marketing themselves online? What’s working for them and what isn’t?

4. Poor financial management

There are a few mistakes that can have an impact on your business’ financials. Perhaps you are lacking funding or capital, your cash flow is short, or you have been a victim of the ubiquitous late payments. 

There are a range of different options to solve poor financial management.

  • Review your payment terms with your clients: are they too long, and could you negotiate that 60-day payment window down to 30 days? 
  • Take up invoice financing. This is where companies pay your invoice before it’s due (taking on the risk that your client might not pay) and in return, they take a small cut of the invoice amount.
  • Sign up for an online payment platform to request payment instantly from your clients and link up your bank to theirs in a couple of clicks via Open Banking. Juno is one of these tools.

Top tip: Make sure that you keep on top of your cash flow management, such as by creating simple cash flow statements or cash flow forecasts. This can help you identify red flags before they develop into critical issues.

Revisit our cash flow for beginners guide or take a look at our top 10 ways to get paid on time.

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