On average, around 20% of all start-ups fail within their first year of business and 60% do not make it to year 3. This is a dramatic statistic, and one that may become worse as economic uncertainties grow.

Running a business is not for the faint of heart; entrepreneurship is inherently risky. Successful business owners must possess the ability to mitigate company-specific risks while simultaneously bringing a product or service to market at a price point that meets consumer demand levels.

To safeguard a new or established business, it is necessary to understand what can lead to business failure and how each obstacle can be managed or avoided altogether.

So, what are some of the most common reasons for business failure?

1. Cash Flow Management

Poor cash flow management is the primary reason for a vast proportion of business failures. Many profitable companies find that they are, for all practical purposes, insolvent – simply because of uneven cash flow. Your year-end profit and loss sheets are virtually irrelevant here; the key is to have enough cash coming in to meet your necessary expenditure on a month-by-month basis.

One issue is that many business owners have to manage their own accounts on top of the various other plates they’re already spinning. More than a third (37%) of business owners have taught themselves tax and invoicing, with the same number handling all their own accounts and finances. Only 15% of business owners said they weren’t involved in managing their finances.

Efficient cash flow management relies on you spreading out your expenditure as much as possible, and ensuring that customer invoices are settled in a timely manner. You should decide on payment terms and uphold them as strictly as possible; these terms might be payment on receipt, or you might give your customers 30 days to settle their accounts. Your choice will depend, to a great extent, on the nature of the industry in which you operate.

2. Bad planning and lack of strategy

“Failing to plan is planning to fail” – cheesy but true. Quite simply, long-term planning is key to the success of any business.

Many firms spread themselves too thin, presuming that operating in a large number of markets will increase their potential turnover. When mapping out the growth of their business, the strategic owner needs to conduct market research to establish who their customers are and what they need. There is nothing wrong with expanding into new markets, however, you should never enter into a new venture without the necessary expertise and resources. You should also think carefully before you commit to new projects at the expense of your core business.

3. Financial Management

All business owners need to be aware of their financial and cash position at any given time. The accurate forecasting of income and costs may lead to a few surprises, but acknowledging financial risks and opportunities will ultimately help support your business.

For example: Inability to pay a tax bill is a remarkably common reason for business failure. HM Revenue and Customs will aggressively chase firms that repeatedly fail to settle their tax bills, and they will eventually petition for insolvency.

If you are an employer, it is vital that you keep on top of your PAYE payments. Do not get trapped into thinking that you can spend employee deductions now and make up the difference at the end of your PAYE period – on that route lies disaster.

4. Leadership

Failing to hire, manage and retain staff is a huge challenge for any business owner. Creating a happy, effective and loyal team is essential and hiring people with values aligned to your business from the start will help you in the long run.

A good leader will communicate, direct, reward and offer the opportunity for personal growth. They will need to act responsibly on behalf of the business and hold themselves accountable otherwise the impact from poor leadership on the company's culture can be detrimental to the success of that business.

As such, a good leader recognises the skills they lack or the jobs they do not have time for and either employs, outsources or seeks professional advice to fill those gaps.

5. Over Reliance On a Few Big Customers

Finally, a large number of businesses fail because they are over-reliant on a very small number of clients. It takes just one unexpected closure to result in significant financial hardship. Short-term future earnings can be massively reduced, and invoices for completed work can go unpaid.

While maintaining caution about spreading yourself too thin, as explained above, you should try not to rely on a very small client base. Minimise your risk by increasing your customer base, diversifying your product portfolio and encouraging your customers to sign contracts with a reasonable notice period.

Business failure can be quick and unexpected. However, the bulk of failures result from poor management or a lack of forethought. Make sure that you are aware of the major risks facing your firm and you can help ensure that you are in the best possible position to avoid them.

If you would like information on how COLLECTaDEBTpro can support your business in mitigating some of these risks, please email us at This email address is being protected from spambots. You need JavaScript enabled to view it. or send us a message via our website.