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According to a report published in October 2014 by commercial insurers RSA, over half of all SMEs fail in the first five years. If you’re thinking about a start-up or are a new small business owner, this statistic is likely to send a shiver up your spine.

While we all learn by our mistakes, the realisations you need may come too late for your business – and there’s no reason to risk it. Instead, learn from the mistakes of others by reading on and discovering five reasons why small businesses fail.

  1. You build your business on dreams It’s easy to start a business thinking that it will be a great way to live a more flexible lifestyle, spend more time with your family, earn more money and never have to answer to anyone again – but the reality is often very different. Research and Realism are the two Must Haves here.
  2. You Don’t Do Your Homework “The reason people fail is because they don’t do their homework,” says leading business expertTheo Paphitis. “It’s about knowing more than the next guy or girl and performing better, and the only way you can do that is through knowledge. It’s basic stuff but we don’t do it.”
    Business mentor and author David Mellor “It’s important that you go into any new venture with your eyes wide open. In all honesty you cannot do enough research and homework before you start. The more unfamiliar the territory is to you, the higher the implementation risk,” he warns.
    The message is clear: before you may any commitments or dramatic decisions (like telling your current boss to take a hike!), thoroughly research the practicalities and costs of your idea and the potential market. Asking a few friends their opinion is not enough.
  3. You Don’t Have Enough Capital to see your through Start-up Small business coach Karyn Greenstreet, President of Passion for Business, cautions: “You need to be able to live for one to two years without income when getting started; often businesses are very slow to get off the ground.”
    Having enough capital to get you through the difficult start-up period, then, is essential – and at least some of it has to be ready, working capital, many experts advise. “Cash is, and will remain, king…. Without cash, your days are numbered,” says Mellor.
  4. You Have a Bad Business Partner You may love your friends, family and spouse or life partner dearly, but that doesn’t necessarily mean that you’ll make ideal business partners. Setting up a start-up can be stressful and time-consuming enough to put a strain on the most solid of relationships, and it may be that the two of you don’t do so well when you’re forced together for hours on end in a business scenario – and you may not have complementary skill sets either.
    Try to find a way that you can collaborate before formalising matters, so that you have an opportunity to see how you interact in practice,” suggests Mell
  5. You don’t have a USP Figure out the true value you bring to the table which is unique and different than others in the marketplace,” says Eric Wagner, life-long entrepreneur and founder of Mightywise Media.
    So often, businesses fail because they’re started by people who have seen other successful businesses in a niche they know something about and thought: I can do that. But there needs to be space in the market for what you’re offering – and if there’s not, you have to create your own by offering something different.

If you’re reading this list and thinking, ‘well I know several other reasons that small businesses can fail,’ you’re quite right – sadly, there are more than five reasons why small businesses fail, which is why this article is called (First) Five Reasons. We’ll be looking at some of the others in future articles.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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