Every year a great many new UK businesses are started and a great many close, and the ONS business demography figures show year after year that a large share of businesses do not reach their fifth birthday. Behind those numbers are individual decisions, and the striking thing about them, from the accountant’s side of the desk, is how few are genuinely unforeseeable.
Businesses rarely fail because of one bad month. They fail because of a weakness that was there from the start, visible in the numbers to anyone who looked, and nobody looked until it was too late to do anything about it.
1. They run out of cash, often while profitable
This is the most common cause by a distance, and it catches people out because it can happen to a business that is making money on paper.
Profit and cash are different things. A business that invoices on 30-day terms and pays its staff weekly is funding its customers. A business that has to buy stock before it can sell it is funding its suppliers. A business growing quickly needs more of both, so the faster it grows, the more cash it needs. Add a VAT quarter and a Corporation Tax bill that nobody set money aside for, and a profitable business can find itself unable to pay wages.
What catches it: a monthly cash flow forecast, built honestly, with payment terms, VAT and tax in the months they actually fall. Its lowest point tells you how much funding you really need, and when. There is more on this in what a lender checks in your cash flow forecast.
2. Not enough people want to buy it at that price
The founder believes in the product, friends and family said they would buy it, and the business opens to find the market is smaller, slower or more price-sensitive than expected.
What catches it: evidence rather than enthusiasm. Talking to potential customers who have no reason to be kind, looking at what they currently pay and to whom, and testing demand before committing to a lease. Market research and a proper competitor analysis turn “people will love this” into a sales figure you can defend.
3. The price does not cover the costs
Many new businesses set prices by looking at competitors and knocking a bit off to win custom. That works if their costs are similar. Often they are not: a new business buys in smaller quantities, has no established efficiencies, and may be paying more rent per customer than a mature competitor.
The result is a business that is busy and loses money, and gets busier and loses more.
What catches it: working out the gross margin on each product or service, and the break-even point for the business as a whole. If break-even needs more customers than the premises can serve or the market can supply, the price, the costs or the model has to change.
4. Fixed costs that trade cannot carry
A lease, a van on finance, a salaried employee: each is a fixed cost that has to be paid whether or not the customers turn up. Businesses that take on large fixed costs early, before trade has proved itself, have very little room for things to go slower than planned, and they usually do.
What catches it: looking at the fixed cost base against a cautious sales forecast, not the optimistic one. If the business only works when everything goes right, it is fragile, and the plan should say how you will reduce that fragility, perhaps a shorter lease, leased rather than bought equipment, or hiring later.
5. Too little money at the start
Closely related to the first reason. Founders understandably want to borrow as little as possible, and often ask for just enough to open, leaving nothing to cover the months while trade builds. Coming back for more money six months later, from a weaker position, is much harder than asking for the right amount at the start.
What catches it: building working capital into the start-up budget as a line of its own, sized from the cash flow forecast rather than guessed.
6. The founder is doing everything
In the early days that is often unavoidable. But a business that depends entirely on one person’s hours has no capacity to grow, no cover for illness, and a founder with no time to look up from the day-to-day and notice that something is going wrong.
What catches it: a plan that costs in help at the point the business can afford it, and a routine of looking at the numbers every month rather than once a year when the accounts are due.
7. Nobody was watching the numbers
This one sits behind most of the others. Plenty of businesses that fail had a business plan. They wrote it to get funding, filed it, and never compared it with what was actually happening. By the time the bank balance made the problem obvious, the options had narrowed.
What catches it: treating the plan as a working document. Comparing actual sales and costs with the forecast every month shows you early, while you can still act, that trade is slower or costs higher than planned. There is more on this in how often you should update your business plan.
What a plan can and cannot do
A business plan does not guarantee success, and no honest adviser will tell you it does. Markets change, competitors appear and some things cannot be predicted. What a plan does is find the predictable problems before they cost you money, and give you something to measure against so you notice the unpredictable ones quickly. There is a longer discussion in does a business plan guarantee success.
SquarePlan’s software builds the monthly cash flow, break-even and profit and loss from your answers, so the weaknesses above show up while you can still change the plan. Once you are trading, our business management support turns your monthly figures into a short report on profit, cash and whether you are on track.