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6 Most Common Reasons Why SMEs Fail

It’s a well-known fact that many SMEs fail before they even get off the ground, but you may take comfort in the fact that the number of new businesses has reached record highs in the UK. So if you’ve got an idea you really believe in and can avoid the mistakes below, you may find the potential reward is well worth the risk.

But first thing first: You need to identify why SMEs fail in the first place! Here are six reasons for SMEs failure you need to be aware of.

Failed - going out of business

1. Insufficient planning

Once you’ve made the decision to set up your own business, it’s very tempting to jump straight in and get going – but it’s important to stay focused and remain patient. Creating a thorough business plan is imperative to success and shouldn’t be rushed as the future of your company could depend on it.

Think carefully about your mission and aims, your sales and marketing strategies and your financial forecasts – and if you really don’t know where to begin, there are plenty of accountants who provide tailored advice on business plans as part of their service.

2. Poor financial management

The reason many small businesses fail is simple – they just run out of money. However, proper planning beforehand and a rigorous system to keep on top of finances can make a significant difference to the health of your business.

It’s important to consider just how much money is required to start up – including all the one-off costs involved at the outset – so make sure you have enough capital for those early days. It’s also worth getting to grips with your clients’ pay schedules to help you determine the specific time of the month you want to pay your own bills. For example if you work in an industry where invoices are normally paid on a monthly basis, you might find it difficult to pay all your own outgoings on a weekly basis.

Make sure you always have a contingency – just because a customer has said they will pay that life-changing sum next week doesn’t mean they will – and if you’re relying on that to pay your own bills or staff, then things could end in tears.

3. Overexpansion

Even if your SME is going well it’s important not to get too ahead of yourself and start expanding before you’re ready. For example, if reality doesn’t match your anticipations of growth, then you might take on an extra lease or extra members of staff that you can’t actually afford. Many businesses have failed because they’ve taken on more than they can cope with so make sure you don’t overstretch yourself – especially in the early days.

Nevertheless, it’s also important not to be overcautious. If your financial projections show you can afford to take on that extra lease or member of staff, then don’t be afraid to do so. It’s all about getting the balance right and nurturing slow and steady growth.

Market research and analysis

4. Lack of market research

One of the most important things to think about when starting up an SME is whether people will use your service or buy your product – and if the answer is yes, who are those potential customers? It’s vital you know who to target and how, to research your competitors and to make sure your business has its own unique selling point. What is it that makes you stand out from the crowd and means people should choose you rather than others doing something similar?

Effective market research will help ensure you don’t get lost in a sea of similar brands and end up folding due to a lack of demand.

In addition, it’s worth carrying out market research on a regular basis in order to keep up with changes to potential clients’ tastes and preferences.

5. Weak leadership

The sort of skills that may make you a successful innovator do not necessarily mean you would be the best person to run the company.

Heading up any business, especially an SME, requires someone who believes in the product, has the determination and drive to keep going when things get tough, and an ability to keep track of finances. They also need to be an excellent communicator – someone who can bring in new clients, can hire and fire staff and can keep existing customers happy.

So while you might have the skills to produce the product or provide the service that you’re trying to sell, if you haven’t managed a team or developed a business strategy before then your SME may suffer. It’s important to recognise your own strengths and weaknesses in order to give your SME the best chance of survival.

However, that doesn’t necessarily mean you need to diminish your role in the business – why not find a business partner who has the same passion and can bring some of the qualities you may lack?

6. Ineffective marketing

So you’re up and running, you’ve got your team of people and now you need the most important thing for any business – customers. And to attract those, you need people to know who you are, what you are selling and crucially – why they should choose you.

Your initial business plan should include a marketing strategy, outlining factors such as whether to go with the more traditional route of printed advertising or to focus on online marketing via social media. Either way, you should have an attractive, easy-to-use and glitch-free website where customers can find out more about your business because having no online presence is a sure way to give your competitors an immediate advantage.

Don’t be afraid to make use of marketing companies if you fear this might be your weak link – effective marketing is critical to success and too many businesses have failed because people just didn’t know they existed.

Most SMEs have the potential for success but are doomed to fail because of a simple lack of planning or mismanagement of funds. By putting time aside to deal with your finances and by employing the right people, you are more likely to succeed and soon have a profitable business to call your own.

About author

Hasib Howlader
Hasib Howlader 1 posts

Hasib Howlader is a director at Hudson Weir, a boutique firm of Insolvency Practitioners, as well as a chartered accountant and chartered tax adviser.

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