The Number One Reason For Business Failure Is…

Business failures and new business start-ups are a favourite subject of Government statistics. Here, Robert Craven examines the main reasons for UK business failure.

Looking at the research, one of the key findings is that only one in five (19%) of those businesses starting-up will survive to their fifth birthday (Warwick Business School). Also, wise and experienced 50 to 55-year-olds stand a better chance of producing surviving businesses than the young, thrusting, would-be entrepreneurs in their early 20s. On reflection, the statistic makes sense.

New businesses with more than one proprietor/partner stand a better chance of survival than solo operations and previous experience in the sector is important. Interestingly enough, gender, possession of a degree, and previous ownership of a business are found to be irrelevant to survival or failure. Also, a period of inactivity prior to start-up does not appear to be an impediment to success.

Faster growth prospects are associated with proprietors who previously held full-time jobs, were home-owners and had ‘O’ levels. The slowest growth tends to be experienced in catering and retailing, and businesses started at home.

Looking to business failure itself, the best source of information comes from the Society of Insolvency Practitioners. They delivered a stinging indictment of the managers of businesses that have failed – it is your own fault that you went bust.

The Society, which represents 85% of the country’s insolvency practitioners, discovered that over one in five (22%) of business failures last year were caused by weak management. The list of managers’ weaknesses spans fraud, over-optimism, imprudent accounting, obsolete products, eroded margins and over-gearing. Taken together, this rogues’ gallery of failings ranks just second in the table of causes of business failure.

The number one position in the league table, given as a reason for failure, is the disappearance of the company’s market. All this translates into the bosses’ failure to take control or react to their business environment. As these particular failings are not part of the “exceptional, external and unforeseeable event” category, it must be the managers that take the blame. Likewise, the “financing” category, as a reason for failure, probably suggests that the managers were being unrealistic about what the financial institutions would support.