Article:

The top 10 reasons for business failure

16 March 2020

History often repeats itself and unfortunately the problems and pitfalls which may impact your business will have been seen before. So often people say “I didn’t see that coming” and yet the problem was something which many businesses had encountered before. As a business leader you can either wait to be blind-sided or you can think about potential changes which could impact your business and plan for how you will react. This will give you the best chance of success and build your business resilience.

The top 10 reasons why businesses fail are:

  1. Not actually understanding what your customers value: So many times companies become engrossed in their technology or what they do, and forget to really understand what their customers want, need or value. The company will then disconnect and simply become a commodity which can be replaced.
  2. Over optimism: Business plans often promote the positives and the best case scenario in a desire to wow investors and get engagement, but it is imperative that you consider what would happen if delays happen and how you would fund this.
  3. Tax and legislation: Suddenly being hit with a GST bill for selling into other countries, or failure to comply with data protection rules, can leave a liability which is hard to fund simply because you didn’t understand the rules.
  4. Complacency about competition: No business stands still and the gap you spot in the market, or the reasons for your competitive advantage, can and will erode over time. You need to assume any advantage you have is for a finite time only.
  5.  Poorly structured finance: In the last recession, countless businesses failed because they relied on short term debt such as overdrafts and credit cards. As the credit crunch hit, these funds were withdrawn. It is easier to arrange your funding structures when things are going well so plan ahead.
  6. Lack of customer diversification: Even the largest customers can fail and this can send ripples through their entire supply chain. It seems obvious, but balancing your risk avoids the risk of critical failure in your business.
  7. Not understanding the maturity of your products: Technology, taste and competition all change and therefore it is safe to assume that over time, your offering will move from growth to maturity and then decline phases unless you invest or diversify.
  8. Lack of market diversification: It has never been easier to go global, and yet so many businesses focus on their home economy and are therefore over exposed to changes in economy or legislation. Other countries show stronger growth, can give access to wider skills and can create new opportunities for growth.
  9. Over-dependence on key staff: All businesses are built on their people and whether it is loss to competition or for personal reasons, no business can let themselves be exposed to a single point of failure in their team. Robust contracts, clear succession planning, welfare at work and incentives for retention are all critical.
  10. Your own resilience: Everyone asks you about your business, but how often do they check you are OK as the business owner? Tough decisions can take mental and physical energy and leave you exposed. If you are struggling you will make slower decisions and could stop driving the business forward. Your business resilience is intrinsically combined with your own mental health and you need to invest in your own wellbeing.

Contact your local BDO office for support and advice on business resilience planning. 

Information included in this insight was last updated on 16.03.2020