Why Do Most Businesses Fail?

For anyone starting a business there is that delicious and intoxicating mixture of excitement tinged with fear. That is partly the fear of the unknown but it is also very much the fear of failure.

Different cultures around the world and different upbringings treat failure in different ways. Many see it as a very necessary step to success and we all learn much more from what goes wrong rather than what goes right as we might simply have been lucky with the things that work and we never analyse them in the same way as we do failures.

But whatever we might learn from failing, and whether this puts us in a much better position for any subsequent attempts, does not alter the fact that failing in business can still be very costly. As such, it is no surprise that I often overhear the question asking why most early stage businesses fail.

According to UK Government statistics there are five very clearly defined most common reasons why startups and early stage businesses fail. In my article four weeks ago (How Much Should I Research the Market?) I mentioned the biggest reason – failure to investigate the market properly. But what are the other main reasons?

The top five reasons businesses fail

  • Not investigating the market properly
  • Failure to produce a full business plan with realistic assumptions
  • Not enough funding
  • Bad location, online presence, and marketing
  • Lack of flexibility and not staying ahead of the curve

These are the ‘official’ reasons and each category does of course cover a wide spectrum, but more importantly of course there are the usual ‘lies, damn lies, and statistics’. Arguably, all five of these reasons for failure can be attributed to lack of knowledge, resources and experience. 

But taking these five points in order it is of course fundamental to ensure that you have a product or service that the market wants, offers something unique, and that you can build and deliver at a price that the market will pay and will produce both a positive cash flow and profit. Having investigated the market properly and comforted yourself and others that this is the case then you need to consider the other reasons for failure.

As I have argued many times, writing a full business plan is the only definite way to ensure that you have considered every aspect of your (potential) business, unearthed many of the possible problems, and found solutions to those problems. It will also ensure that you produce projected financial forecasts and, perhaps even more importantly, that you consider the assumptions behind those projections.

Once the business plan and the numbers have been done you will have a much clearer idea of the cash flows of the business, both in and out, as well as the timings and expected growth in revenues and planned expenditure in order to support that growth. All of this will enable you to see if and when you will run out of money - the so called runway – and if you do run out, when you will need to raise finance in some form and how much. Remember that funding does not have to mean selling a stake in the business, but for many early stage businesses wanting to raise substantial amounts that does often become the only viable route. Remember that in my ‘How Long Will It Take?’ article last week I said that you should expect everything to take twice as long and cost twice as much as you might hope. Raising equity will typically take around 6 months and one of my biggest frustrations is that so many founders approach me and say that they need the money within two or three months.

Whatever else you get right or wrong in your business, without sales it will not last very long. And sales of course come down to location, online presence, and marketing. The exact mix, like everything else, varies from one company to the next depending on their product or service and the sector in which they operate. Sales do not necessarily mean profit, but no sales definitely means losses.

Lastly, however good your business is now, and however far ahead of the competition you might be now, if you and your businesses does not remain flexible and innovative, and remain ahead of the curve, then you will very surely be overtaken by others. Put simply it is like an aeroplane, if it does not keep moving forward it will drop out of the sky.

So, they are the official top five reasons why businesses fail, but my answer as to why businesses fail is much more simple and all encompassing - lack of knowledge, resources and experience. The good news is that all of this can quite easily be solved by working with the right team and partners. So do not be afraid of failure, embrace the excitement, and make sure that you fill the gaps in knowledge and experience that will ensure your business grows and prospers.


in British English


to prosper or cause to prosper vigorously and rapidly