Why do businesses fail?

Businesses fail all the time. Even huge, established, high-street names that have been patronised by generations can eventually come down, either through poor management or factors outside of their control.

There are many reasons why businesses fail, and not all of them must lead to permanent closures that can never be recovered from.

Understanding how these events come about doesn’t guarantee they won’t happen, but it can help businesses stay vigilant and make wiser decisions.

What are some businesses that have failed?

When looking at examples of failing businesses, you could look to specific names that have collapsed, or you could take a more broad perspective of businesses in sectors that themselves have struggled or become redundant due to changing social values, market turbulence, or advancing technology.

A recent example of a huge business failing in the UK is that of the Debenhams chain of department stores.

Debenhams’ failure is a particularly noteworthy example of how long-term business success doesn’t guarantee protection from eventual failure, given that the first store which signalled the start of the business empire was established in 1778.

However, Debenhams is also a strong example of the fact that not all failures are all-encompassing or permanent.

Despite closing every physical store under the brand name, the business was sold and continues under the same name solely as an online retailer.

Regarding businesses that have failed due to the market they operate in, a straightforward example is that of Blockbuster, which was one of the most recognisable businesses in video rental when the practice was commonplace.

Changes in technology and entertainment eventually wore the business down and made it redundant; from a business employing more than 84,000 people globally, to one that eventually was declared bankrupt in 2010.

In Blockbuster’s case, its failure was not so much due to mismanagement as much as it was simply a victim of changing times and accessible internet making its business model redundant.

What type of business fails the most?

The latest available figures by the Office for National Statistics paint a turbulent picture for the transport and storage (including postal) industry in the UK. While this industry has the highest ‘birth’ rate—that is, more businesses were founded in this industry than any other—it also has the highest ‘death’ rate.

In fact, failing transport and storage businesses currently make up a little over a fifth of all business failures in the UK at a rate of 21.8 per cent. The second highest belongs to the information and communication industry at 15.6 per cent, and the third, business administration and support services at 14.6 per cent.

The high birth and death rates of transport and storage companies makes sense in the context of their demand.

High demand for home delivery services was at its peak during the COVID-19 pandemic, making the industry even more competitive. More businesses starting also means more failing.

Top 10 reasons businesses fail

Businesses fail for a wide range of reasons, some controllable, others not.

Among these are some reasons that spell the end of businesses more often than others, including:

Inadequate planning and research

Starting a business demands a heavy amount of preparation. You need to familiarise yourself with legalities, business taxes, and the various obligations of employers if you plan to hire people to work for you.

Between this and researching the markets in which they want to compete, businesses can easily fail through a sheer lack of preparedness for what they’re trying to achieve.

Proper planning can not only help business founders understand how to focus their goals, but can also familiarise them with common pitfalls and ‘rookie errors’ to be avoided.

Lack of funding

Profit is often a big factor in wanting to start a business, but unfortunately, founding a business can take no small amount of money to begin with. Some businesses could take a lot of investment before they’re ready to operate, and others may even need to operate on a loss before turning a profit.

While there are incredible stories of business leaders successfully turning things around for insolvent businesses, thanks to smart decisions or gambles paying off through sheer luck, these tales are few and far between.

It’s more likely that a lack of finances may lead to bankruptcy, though a timely business turnaround can prevent the worst from happening.

Failure to adapt

Almost nothing is static in the world of business, and companies that don’t keep an eye out for relevant changes risk being left behind. There are many ways in which failing to change can hamper a business, be it refusing to keep up with technology or failing to respond to the changing values of workforces.

Any market is open to disruptors who can come in and change paradigms overnight, so businesses need to keep an eye on the future and be ready to adapt to the changing landscape.

Poor management

Managing a business poorly is one of the most obvious ways that it can fail. However, not only can this relate to the management of the business itself, but also how its people and partners are managed.

A business that fails to look after its people risks a high staff turnover, particularly in sectors that already suffer the higher rates of turnover like manufacturing and construction.

A staff exodus at the wrong time can easily collapse a business completely.

Unnecessary risks

Fortune can easily turn when businesses overextend and take risks that they don’t need to, especially when a new business banks on a poorly judged gambit. Business leaders can easily get drunk on success, and this can lead to poor decisions and risky investments.

At a time where new technologies are being tested as future economies in so many ways, large businesses can afford to test their involvement with Bitcoin or NFTs.

Small businesses still looking to make £1m in turnover? Not so much.

Mishandling finances

Not all financial mismanagement can be equated with risky behaviour. Some businesses simply may not manage their finances well enough, whether that’s through a poor understanding of cash flow, or neglecting to keep on top of their accounting.

Handling money and assets smartly is essential. At best, you’ll give yourself a constant headache when it comes to dealing with Companies House and HMRC.

At worst, you can slip into insolvency and struggle to manage debts that could have easily been managed with better organisation and sound knowledge.

Lack of marketing

Your product could be the best in its niche, but what will that matter if nobody can find it or even knows that it exists? Marketing covers many activities and practices, from posting to social media and a blog, to paying for billboard space in your local city.

Marketing is what will keep people engaging with your business and coming to buy, be it for the first time or the hundredth. Great customer service is just as much a part of marketing as the adverts, and so a business cannot focus purely on admin and finances. It needs great people helping people, too!

Unsustainable or uncontrollable growth

Many businesses start small, and some choose to stay small. Others pursue—or happen upon—healthy growth due to popularity or to widen their reach nationally or globally.

Whether a business grows through fortune or deliberately as part of its growth plan, this growth must be managed and shown an appropriate sense of restraint where necessary. Overextending can leave you running to catch up, for example, hiring high numbers of staff in a short space of time. This can complicate paying wages and giving new hires the training they need to start off on the right footing.

Not hiring the right people

Following on from the previous example, failing to find the right people can bring a business down as it struggles to compete with its peers who are busy pulling in the best talent they can find.

A business might be hiring plenty of people who know how to delegate and manage others, but is it focusing on the people who will do the essential work and make it their own? Businesses are as much about drive and passion as they are about money and strategy. Finding the people that bring that passion for what they do and how they can help the business’s goals is essential.

Not seeking help

Everybody struggles to ask for help at times, even those heading up multimillion-pound businesses. However, sometimes, situations occur that simply cannot be negotiated alone.

Leaders are notorious for avoiding asking for help, and such situations are especially common when it comes to finances. It can feel embarrassing, and this paralysis when it comes to support from others can easily lead to the downfall of a business as various functions fail and the business fractures.

Why do big companies fail?

Small businesses are shown to fail in large numbers every year, but what about the large ones? Why do businesses fail despite having years of experience behind them and mindboggling sums of cash?

Many of the reasons that big businesses fail are the same as those that bring down small businesses, but with far more devastating consequences. For instance, if a small business makes a poor decision when choosing a courier, they may risk upsetting a handful of customers.

But when a large business makes that poor decision, the consequences are accordingly large and far reaching. Such was the case when fast food business KFC switched their delivery provider. Despite being warned about the move, it went ahead with the change and ended up needing to close almost half of its outlets across the UK.

While this hasn’t come close to spelling the end of the business, it shows how refusing to heed advice can have resounding consequences on a business’s operations, even as a result of a relatively minor change.

When the growth and status of a big business is well established, its management presents the biggest liability to its continued success.

Five ways to prevent business failure

Make plans and follow them

Your business can’t measure its success if it doesn’t know how near or far it is from a plan. Planning ahead will let you forecast finances, decide what moves to make when, and how the years ahead should look.

Even when unexpected changes occur, you can adapt the plan rather than be left fumbling for ideas.

Control what you can

It’s an unfair yet unfortunate fact of life that there are many things that can’t be controlled. This is no different for your business, but there is still plenty of control that remains in the hands of even big business leaders.

You can’t guarantee that your marketing will go viral or that the markets will stay stable all year, but you can ensure that decisions are made wisely and that everybody has a sound business plan to follow. Focus on what you control and control it well.

Manage finances well

Invest money into the business wisely and try to avoid needing to use personal finances to keep it going. Consider the help of an accountant to keep things balanced and to gain sound financial advice.

Don’t combat debts with further borrowing. As soon as insolvency seems like a likely outcome, seek the help of licensed insolvency practitioners to turn things around.

Always listen and learn

Listen to other business leaders and take on their advice. It’s never too late to learn something new, and plenty of business owners have stepped into mistakes that you don’t have to. There’s a wealth of knowledge and experience out there that can guide your business.

Be patient

Plenty of businesses took years to turn a profit, some of them now being the biggest on the globe today. Yours may need to turn a small profit for a while before real growth can happen. Whatever the case, be patient and continue to make the right choices. They will pay off eventually.

How do I stop my business from failing?

Some businesses fail seemingly overnight, but if you see the signs that yours is in trouble, it’s not too late.

The team at Irwin Insolvency includes experts in helping a business turn around, and we can help put you on the road to recovery and come back from insolvency.

To learn more about our services for businesses and individuals, contact our team today.