5 Reasons Why Small Businesses Fail – And How to Avoid Them

Stressed cafe owner in failed small business

5 Reasons Why Small Businesses Fail – And How to Avoid Them

by | Jun 3, 2024

Nobody sets up a new business thinking it will fail. However, the unfortunate reality is that staying afloat as a small business is no easy task. Statistics show that approximately;  

  • 20% of small businesses fail within the first year 
  • 40% of small businesses fail within the first three years, and: 
  • 50% of small businesses fail within the first five years.  

What makes it so hard to keep your business going in the first few years of life? In this blog, we will explore 5 common reasons why new businesses fail, and we advise on how you can avoid falling prey to the pitfalls of running a new business, so that you and your business can thrive. 

Reason 1 – Financial management

A lack of immediate and consistent income after the expenditure of setting up a new business can often leave people feeling the pinch, especially if they were not already trading beforehand (such as a sole trader converting to a company limited by shares). 

Taking out loans to cover early shortfalls or to inject some finance into the business, if done responsibly, can be a good way to help launch your business in those early stages. However, if you do not research properly you may struggle to repay those loans, due to lack of income or high interest rates. In the long run, this will do more harm than good. Consider consulting a financial advisor before signing up for a financial commitment. 

The current high cost of living can affect a business due to the increased costs of materials, electricity, gas, rent and vehicles. If you work from home, you will need to factor in the cost of your equipment and materials as well as the increase to utility bills. You may be eligible to be reimbursed for related costs through HMRC. All costs should be considered to fully appreciate the financial undertaking you will be making opening your own business.  


Pre-planning and managing your budget are essential to run a company. Before you start, research the cost of materials, utilities, and rental costs. Make a spreadsheet of expected monthly costs for your business compared against how long you can sustain these costs without an immediate income. Research ways of injecting cash into your business and do not take on more than you can afford just to try and make yourself an instant success. 

Make sure to keep accurate records of your finances from the very beginning, so you can review the incomings and outgoings against your forecasts. Maintenance of your records will also be required for statutory requirements and to prepare accurate financial accounts. Adapt to your current financial situation, and remember that running a business is a marathon, not a sprint – it can take years for a company to become profitable. 

Reason 2 – No business plan

You would not go on holiday without doing research first, and running a business should be no different. To prepare, create a detailed plan including market and product research, financial forecasts, research of the customer demographic, and goals with realistic time frames.  


Before setting up your business, sit down and create a solid business plan. This can vary in length depending on the level of detail, but should generally be around 8-10 pages, including: 

  • What your business is and what it is going to do
    • What exactly is your business is going to offer customers?
    • Does the company name fit with this?
    • Who are your target customers?
  • Running costs
    • How much do materials cost?
    • What costs do you expect to increase if you are working from home?
    • Are you going to pay yourself a wage through the company?
  • Market and competition
    • What market are you trying to enter? Is it overpopulated?
    • Who are your competitors? You should review how many competitors cover the same geographical location, their prices, and reviews.
    • What will set your company apart from your competitors? Businesses entering already saturated industries will find it hard to make themselves seen.
  • Timescale
    • Where do you want your business to be in the first week, month, six months and year? Be realistic with your goals and when they can be achieved. The point of laying these out is to be as accurate as possible, so that it is easier to stick to the plan.

If your reality is not matching your business plan, update your business plan. In the world of business, it is better to adapt than to fail.  

Reason 3 – Poor Marketing

Think of how many times you search for a company by using a search engine, or by stumbling across a page on social media. Now imagine how hard it would be for clients to find you if you were not accessible on those sites.  

There is more to marketing than putting a handful of posts on Facebook. You need to think about the demographic of your target audience and find the most suitable platforms for that audience. For example, Facebook users are almost 3x more likely to be in the 18-29 age range than the 65 and over age range. And users of Instagram are a staggering 8x more likely to be aged 18-29 than over 65. Using social media and marketing campaigns that do not work for your target audience will make them ineffective, and therefore waste money. Consider your own shopping habits, what information do you look for online? What do you do if you cannot find this?  Many customers are likely to find an alternative seller if information is not readily available online. 


Research your chosen demographic, including all factors like age, location, gender, and income and which social media platforms is most suitable. Be sure to post regularly and to engage with your customers to improve engagement and visibility.  

Utilise free review sites and ask former clients to leave reviews for your company. This helps advertise to potential clients that your services are professional and trustworthy and adds credibility. 

Reason 4 – Failure to adapt

Once you start trading, you may find things progressing slower than anticipated. Perhaps there is too much competition, not enough demand for or interest in your product, perhaps the interest of your identified demographic has changed. Whatever the reason may be, you have two choices in this scenario, adapt or risk failure.   

When Netflix first started, they mailed out DVDs. However, over time they realized that audience habits were changing and adapted to a streaming based service. By adapting to the change in consumer demands, they became one of the most successful companies.  


Equally as important as a business plan is the ability to adapt if the original plan is not working or the goals are no longer achievable. It may be hard to admit that the business idea you had is not working as planned, but learning to adapt in these situations is essential to survival. 

Start by trying to identify what it is that currently isn’t working and begin to make small changes, monitoring the effects they have until you achieve the desired outcome. If you are struggling to identify why you are not meeting your goals, reach out to others around you or a business advisor. 

Reason 5 – Poor management

Running a business usually involves juggling multiple components, including day to day management, finances and taxes, stock management, statutory requirements, and marketing. This is a lot for one person to handle, especially if you don’t have experience in some of these fields.  

A failure to understand when you have taken on more than you can handle, and a failure to get support can lead to a mismanagement of your business, which will ultimately be detrimental to it, and to you.  


Nobody is an expert at everything, so hiring some help may be beneficial to you. Although an expense, consider outsourcing on the aspects you are struggling with the most to allow you to focus your time better. This could be in the form of a co-director, an assistant, accountant, or marketer. 

Understanding all the aspects of business management can be tricky, so consider reading books/blogs or watching some webinars to get a better understanding of all the aspects of running a business. Knowing the pitfalls that you may come across, and the best way to avoid these, or overcome them if you do fall foul, is the best way to help your business to succeed and thrive.  

Next Steps

Be sure to check out the following websites for information relating to the topics raised in this blog post.  

For government backed advice on finance, check out Money Helper and the British Business Bank

To start writing a business plan, The Prince’s Trust and Government website have useful templates and information on contents. 

If you are looking for a guide to kickstart your marketing, Xero have a comprehensive article with helpful ideas. 

Please note, 1st Choice Incorporations are not affiliated with any of the websites listed above and have listed them for educational purposes only.  

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