Why most businesses fail in the first 3 years

If you’re considering starting a new business, it’s crucial to understand the reasons why most businesses fail. This knowledge will help you to avoid the common mistakes that result in the majority of business startups turning to dust in the first 3 years.

The reality is that there is no single magic ingredient for success. A good business idea is paramount, of course. Hard work and determination are also essential. But these things alone are unlikely to lead to business success.

Establishing a viable and sustainable business relies on many different elements working in unison, from planning and research to personality and mindset, all of which are dependent upon the effectiveness of those in charge.

Every entrepreneur experiences challenges, failures, and crippling self-doubt on their journey – it’s inevitable. However, the difference between those who continue to fail and those who eventually succeed comes down to resilience and the ability to learn from mistakes. To achieve success, you must first learn to embrace failure.

Most common reasons why new businesses fail

Whilst external events such as pandemics, recession, natural disasters, and war can force otherwise promising or successful businesses to fold, the vast majority of businesses fail for one fundamental reason: ineffective management. Quite simply, it’s a people problem.

Ineffective management usually stems from a lack of relevant knowledge, underdeveloped skills, and/or an unwillingness to make necessary adjustments to personal behaviour and/or business processes. It is, without a doubt, the biggest threat to business performance and success.

This underlying issue can infiltrate any and all aspects of a business, leading to poor decision-making and the emergence of serious surface-level symptoms. Eventually, or sometimes quickly, these issues can snowball to the point of no return.

Below, we highlight the most common reasons why businesses fail as a direct result of ineffective management. This knowledge should give you a better grounding for starting a business and making it a success.

1. Lack of planning and research

Planning and research are crucial in every aspect of setting up and running a business. Fundamental shortcomings in the application of these two practices could have a catastrophic effect on your business, most likely before it even gets started.

Methodical and strategic planning, underpinned by extensive research, will enable you to determine, analyse, and monitor the viability and functioning of your business and the market in which it operates.

As a result, your business is less likely to fail. You will have a far greater awareness of what is going on, which will enable you to respond quickly when existing or potential problems are identified.

To highlight the importance of planning and research in business, we have listed just some of the areas that rely on these strategic practices:

Business viability

• Determining if there is a market for your products or services
• Establishing the purpose, aims, and values of the business
• Calculating startup costs and securing funding, if required
• Identifying potential challenges and solutions
• Setting realistic goals and expectations

Smooth operations

• Effectively managing cash flow
• Understanding the needs and expectations of customers
• Identifying and monitoring competitors
• Ensuring that your business can efficiently meet demand and expectations, e.g. workforce requirements, quality control, production and delivery timescales, competitive pricing and profitability, adhering to brand values, establishing and maintaining positive customer and supplier relations
• Developing and managing your marketing strategy – how to sell the right product in the right place in the right way to the right customer at the right time
• Developing a healthy and productive workplace for employees and the business owner(s) alike

Opportunities and threats

• Monitoring trends to identify shifts in consumer needs and behaviour
• Making realistic future projections
• Identifying and managing opportunities for growth
• Analysing and monitoring the external environment, e.g. industry, competitors, and economic conditions such as unemployment rates, interest rates, gross domestic product (GDP), changes to tax and government regulations, trade restrictions, etc.
• Ensuring that the business has all relevant licences and insurance
• Adhering to regulations and maintaining the statutory obligations of the business, e.g. bookkeeping, filing accounts, paying taxes, meeting health and safety requirements

Many of the above points will form part of a business plan, which is why it is crucial to create one before setting up a business. Additionally, most banks and investors will require a business plan if you are applying for funding or financial backing.

2. Cash flow problems

Running out of money is one of the most commonly cited grounds for business failure. Whether financial issues are a result of underestimating startup or running costs, an inability to obtain financing, low sales, unexpected tax bills, or unpaid customer invoices – cash flow problems are almost always the result of poor management.

The majority of new business owners have little understanding of cash flow, which is not at all surprising. Planning and research can help you to structure your finance and manage cash flow effectively. Ideally, you should seek professional guidance and help from a business adviser and an accountant to gain the best understanding of this complex subject.

Before you start a business, you need to know:

• How much it’s going to cost to get the business set up and operational
• How much it’s going to cost to sustain it during the initial stages until you begin to make a profit
• The ongoing costs of staying in business

Many businesses take around 2-3 years to become profitable, so you need to bear this in mind and have realistic expectations of the amount of income your business is going to generate. This means that you will need sufficient capital to cover all costs until the business becomes profitable. Additionally, you need to consider how you are going to support yourself financially during that time.

3. Insufficient or no demand for product or service

It may sound like we’re stating the obvious here, but it is not uncommon for businesses to be set up without having established whether anyone will buy what they are selling. This often happens when people think “Well, I like it, so surely everyone else will.” Sadly, that’s not the case, no matter how great the idea.

You must do market research before committing to a business idea. This will tell you whether there is any demand, whether that market is large enough to be profitable and provide long-term success, and how to make a successful market introduction to reach your target audience.

That being said, very few new products and services are ‘essential’. Most of the things we purchase are simply things that we desire to enhance the subjective quality of our lives. As a result, the difference between high demand and no demand is often down to the way in which products and services are marketed. Again, this highlights the crucial nature of planning and research.

Once your business is established, you must continuously monitor your own market and industry, as well as adjacent industries, technological developments, the economy, and general societal trends. By keeping your finger on the pulse, you will be better placed to ensure that your product or service remains essential or desirable, minimising the risk of business failure.

4. Ineffective marketing

Oftentimes, inexperienced entrepreneurs and those with ineffective management skills target the wrong market, whilst others attempt to target every person in existence. These strategies will certainly produce results, but not the kind you want. Ineffective marketing is entirely preventable yet incredibly common due to a lack of knowledge and expertise.

You need to define your audience based on effective market research, targeting, and communicating with them through a strategic marketing plan. This approach will provide you with the best chance of long-term business success.

You may need to hire a professional, but employing an expert or outsourcing this part of your business will provide a healthy return on investment through increased sales and a sustainable business model.

Establishing a strong online presence through a well-designed professional website and social media channels is also a big part of marketing, no matter what you’re selling and who you’re targeting. More and more people of every generation are embracing the digital age, so your business must be online to some extent.

5. Starting a business for the wrong reasons

According to SME Loans, 64% of the British workforce wants to start their own business, with that figure rising to 83% for 18-24 year olds. However, it’s essential that any decision to set up your own business is made for the right reasons, otherwise, it may be a disappointing and short-lived endeavour.

Whilst there are countless benefits to working for yourself, do not underestimate the time, money, hard work, and dedication required. If your primary reason for starting a business is simply to become incredibly wealthy, have more free time to spend with family and friends, be able to pick and choose when you work or have an easier life, there’s a much higher chance of the business failing.

To become a successful entrepreneur, you need to have the right mindset for business and genuine enthusiasm for what you’re doing. If you love the work and truly believe in your products or services, you’ll find it easier to cope with the inevitable challenges and stress.

On the other hand, if you set up a business for the wrong reasons, you will find it much more difficult to deal with the demands of being an entrepreneur, which could cause your business to fail and damage your own wellbeing.

6. Lacking the required knowledge, skills, and expertise

Many entrepreneurs make the mistake of starting a business without the requisite knowledge, skills, and expertise to do the job properly. We’re not suggesting that you need to be an expert in every aspect of running a business, but you must be acutely aware of your limitations if you wish to make good management decisions and achieve success.

It’s rare for any new business owner to possess the required management expertise and business acumen in areas such as planning and research, finance and accounting, buying and selling, production, marketing, recruitment and HR, and leadership. Unfortunately, many fail to recognise or acknowledge this reality, which inevitably leads to the demise of their businesses.

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To remedy this problem, you need to seek advice and guidance from experts, continuously improve your own knowledge and skillset (where possible) and hire experienced professionals when required. We all have different strengths and weaknesses, and one of the most important strengths you can have as an entrepreneur is knowing and accepting your own limitations.

7. Unwillingness to learn, adapt or diversify

None of us knows everything, we all make mistakes, and the world is constantly changing. Unless you want your business to fail, you must be prepared to learn, adapt, and diversify whenever required. These attributes are part and parcel of running a successful business. Unfortunately, many business owners are either unwilling to embrace them or unaware of their importance.

If there is a problem within your business, whether it’s a drop in sales or a decrease in employee productivity, it’s in your best interests to find out exactly what the problem is, understand what is causing the issue, and make the necessary changes to fix it.

8. Leadership issues

Effective management and business success rely on great leadership characteristics and qualities. Thus, entrepreneurs with leadership issues often self-sabotage their own businesses. This is why self-awareness is so important. It’s all too easy to blame other people or external influences when things go wrong, but could the problem be closer to home? It’s better if it is because that means you have the power to fix it!

To be a great leader, you must:

• Be a role model and set the right example through your actions and behaviour
• Understand your own attributes and limitations
• Continue learning and developing your skills
• Hire competent people and be able to delegate
• Create a positive and supportive workplace that encourages productivity
• Treat people with respect
• Be a good listener
• Communicate effectively
• Be able to address and resolve conflict within the business
• Make informed and timely decisions
• Take responsibility for your actions
• Know what is going on in your business at all times whilst avoiding micro-management

Too many businesses fail or are unable to reach their full potential due to poor leadership. If employee turnover is high, you need to ask yourself why and work out how to fix the issue as quickly as possible. If sales are low, could this be rectified by improving your leadership skills and those of other partners or managers in the business?

Leadership conflict can also be a cause of business failure. If you decide to go into business with other people, you must be confident that you share the same vision and can work together effectively. This is one of the many reasons why it is important to have a clear business plan that outlines the objectives of the business and the responsibilities of each partner. By creating a business plan at the very beginning, you can avoid most conflicts altogether.

9. Lack of effort or commitment

Too many new businesses fail because people simply don’t put in the work, or they give up when things get tough. Whether it comes down to apathy, complacency, laziness, or underestimating the amount of work required, the end result is the same.

A lack of effort or commitment can lead to inferior products or services, low sales, disgruntled customers, cash flow problems, unfulfilled statutory duties, unexpected bills or other liabilities, data protection breaches, and high employee turnover… the list is endless.

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If you set up a business for the right reasons and have a genuine enthusiasm for what you’re doing, these detrimental characteristics are far less likely to exist.

If you do find that your interest in your business is diminishing, you need to take a step back and work out the root cause:

• Is this really the work that you want to be doing?
• Is it still beneficial to your life, or have your priorities changed?
• Do you feel that it is a temporary phase due to other pressures in your personal life?
• Are there any changes that you could make to increase your enthusiasm?
• Are you neglecting your well-being to the point of experiencing entrepreneurial burnout?

There are countless reasons why entrepreneurs lose interest in their business, but it is an issue that needs to be addressed quickly to minimise the damage to your business and personal well-being.

10. Employee issues

Businesses that require employees must be cautious of being exposed to risk in this aspect of operations, such as over-dependence on a specific person, losing staff to competitors, or productivity issues as a result of employee wellbeing and satisfaction.

If a single point of failure within a team could destroy the entire business, changes need to be made to minimise such risks. This requires investing time and money in the right people, creating robust contracts, managing employees effectively, creating a positive workplace environment, and ensuring contingency plans are in place.

11. The Wrong Location

Do not underestimate the significance of location when setting up a new business. Whether you require permanent physical premises for passing trade, a professional location to meet with clients and investors, or a registered office or business address for an online or home-based business, you need to give careful consideration to location.

Choosing the wrong location can be disastrous, so you must spend time researching the best location for your new business. Things to consider include:

• Location of the target market
• Location of competitors
• Demographics and reputation of the area
• Other businesses in the surrounding areas
• Visibility and foot-traffic potential, if relevant
• Accessibility and parking for customers, employees, and deliveries
• Availability of required services that your business needs to operate efficiently
• Condition and infrastructure of premises
• Viability of premises for immediate and future needs
• Cost-benefit analysis

If you’re setting up an online business or some other type of venture that doesn’t require customers or clients to visit commercial premises, the ideal location for your startup could be your own home. In such instances, a professional registered office or business address will add significant value to your new enterprise.

12. Entrepreneurial burnout

Setting up and running a business can take its toll, both mentally and physically, leading to entrepreneurial burnout. Sadly, the strain can cause otherwise great businesses to fail, so it’s important to consider your own well-being and avoid trying to do everything yourself.

Burnout is a rapidly evolving workplace phenomenon that is officially recognised by the World Health Organisation (WHO). It is not a problem within the individual who is experiencing it; rather, it is caused by the pressures placed upon the individual by the business.

To be successful, a business requires a healthy, happy, and productive leader who makes smart decisions. Setting realistic goals, being able to delegate, and viewing failure and setbacks as valuable learning opportunities will markedly improve your own resilience, boost productivity, and help you to stay on track for success.

When to consider pivoting a business

Pivoting involves strategically changing the course of your business in order to improve viability or increase profitability.

Several businesses have done this in the past when it appeared they were about to fail, with one of the most impressive examples of this being Netflix.

Indeed, Netflix have successfully pivoted their business model twice in response to evolving consumer trends.

Founded in 1997, Netflix initially provided DVD rentals by post, subsequently pivoting to a digital streaming service in 2007. Then, in 2013, the business pivoted a second time by producing its own content.

These innovative strategies have enabled Netflix to remain relevant and highly profitable whilst maintaining its original vision.

However, not every company is a Netflix and there’s a lot of risk that comes with pivoting a business model. However, there are a few things you can do to help mitigate some of the risks involved.

How to pivot your business successfully

1. Gather and listen to feedback

Information gathered during the course of running your business is key to understanding what’s working and what needs to be improved. This includes indirect and direct feedback from customers, market research, sales figures, and insight from staff. All of this valuable data will help you to make informed, strategic decisions and identify when it’s time to make some changes.

2. Analyse the competition

Before pivoting a business, analyse your competitors. What are they doing well? Think about how you can improve on their offerings. Is it possible to compete and still turn a significant enough profit? Look at where they are falling short. Are you making the same mistakes?

3. Ensure any changes you make are sustainable in the long term

It’s important to know exactly where you want to go before pivoting a business in a new direction. Otherwise, you may simply end up encountering a different problem further down the line.

Whether your startup has failed to take off, or your previously successful business has plateaued, ensure that any changes you make provide opportunities for growth and are sustainable in the long run.

4. Act quickly

When you have identified a problem or opportunity, you need to act quickly and decisively. By doing so, you can begin to direct money, time, and essential resources to your new strategy. The window of opportunity may be short-lived, so don’t waste time procrastinating once the decision to pivot has been made.

So there you have it!

Statistically, most businesses are destined to fail. The exact percentage, however, is hard to pin down. Numerous articles flying around online suggest that the failure rate for startups is around the 90% mark. Such studies, however, are often working within the confines of relatively small sample sizes, which are not representative of businesses on the whole.

The Telegraph reported that 60% of new businesses fail within three years, with 20% of those going under within the first year. Similarly, the Office of National Statistics (ONS) reveals that only 42.5% of new businesses are still trading in their fifth year (2014-2019). These figures present a more reasonable picture of business success and failure in the UK.

Whilst the failure rate for new businesses is high, it’s important to note that the number of UK company formations (incorporations) has been greater than the number of dissolutions each year since 2010.

There is certainly an abundance of opportunity for new and existing businesses to meet the changing needs of consumers and provide long-term success to their founders. If you’ve caught the entrepreneurial bug and think the time is right to take the plunge, you now know why most businesses fail and how to avoid these common pitfalls on your journey to success.

We hope you have found this article of interest. If you have any questions, please leave them in the comment section below and we will get straight back to you!