Why Do Businesses Fail? Internal & External Causes

Why do businesses fail?

There are numerous reasons why a business might fail, depending on the circumstances. From global recession to technology disruption, supply chain problems, and reputation issues, there are countless risks and potential threats to a business, whether it be new, small, or established.

Read on to discover 10 of the most common reasons why businesses fail, plus the top 3 internal and external causes of small business failure.

10 reasons why businesses fail

• Failure to innovate

• Failure to adapt

• Unsustainable business model

• Poor market research

• Lack of strategic focus

• Overexpansion

• Not hiring the right people

• Not putting customers first

• Lack of digital focus

• Misunderstanding your USP

Any one of these issues could derail the success of a business. Over and above these, however, there are 4 main causes of small business failure:

2 external (outside the business’ sphere of control) causes of business failure: 

1. Finance issues

2. Lack of market

2 internal (caused by the business itself) causes of business failure:

1. Poor business planning

2. Team disharmony

Top external causes of business failure (with examples)

Financing issues

A new study by Skynova has found that nearly half (47%) of startup failures in 2022 were due to a lack of financing. In fact, almost all (91%) of the founders polled blamed lack of finance or running out of cash for their business failure. 

One example of a seemingly popular startup that ended up this way is UK radio station Radar Radio, which owed around £3.6m to its parent company Mash Holdings before ceasing to operate in 2018.

Lack of market

CB Insights researchers found that 42% of the companies on their list that shut down did so because there was no market need for their products or services. 

An example of a business that closed due to lack of market is EventVue, which was an app for conference organizers. The app’s target audience weren’t particularly interested in the app, since it didn’t solve the issues they most cared about, like cutting costs or selling additional tickets.

Top internal causes of business failure (with examples)

Poor business planning

58% of the founders polled by Skynova said they wished they had put together a stronger business plan. 

There are countless examples of businesses failing due to poor business planning. Whether it be Blockbuster failing to spot the opportunity the Netflix deal presented, or the countless startups that fail to secure investment because their business plans aren’t up to scratch, poor business planning is a broad category of business failure that cannot be overstated.

Team disharmony

The top internal reason for startup failure according to Skynova’s data (21%) was disharmony among the team and/or investors. 

WordPerfect is a well-known example of a business that went bust thanks to disharmony between Novell and the WordPerfect executive team. As it was reported in the Washington Post, the marriage of Novell's main product to the word processing business was “an uneasy one”.

10 solutions to avoid business failure

Even if you don't already see the first warning signs of business failure emerging, it's never too early to start taking steps to protect your business. Here are 10 solutions to explore.

1. Identify your business weaknesses

You can’t strategize a route forward before you understand exactly where you’re at. So the first step in avoiding business failure is conducting an analysis of your business strengths and weaknesses. This allows business owners to pivot if necessary. In fact, 40% of the startup founders polled by Skynova said they had done this to avoid failure. 75% said pivoting had helped lead to success. 

2. Identify your human capital weaknesses

A large number of small businesses fail because business owners don’t identify their own weaknesses and/or team skills gaps. As a business owner, you’re unlikely to be a marketing genius, finance wizard, inspirational motivator, and every other character trait a business needs. And identifying these gaps means you can do something about it (see points 4 and 9).

3. Focus and prioritize 

A common failing of small businesses is that they try to be all things to all people. As the saying goes, a Jack of all trades is a master of none, so determine what it is that your business does really well – or wants to do really well – and make that your priority.

4. Delegate

You can’t do everything—nor should you. Not only does delegation free you up as a business leader to perform higher level tasks to further the business, it also generates trust and creates stronger, more capable and engaged teams.

5. Review your marketing strategy 

If there are market issues, whether you’re targeting the wrong people or have misunderstood your USP, it’s critical to discover these sooner rather than later and review your marketing strategy accordingly—before you spend any more money on tactics that aren’t achieving ROI.

6. Analyze your data

If you’ve got customer data – be it website analytics, call centre queries, social media engagement, or sales statistics – dig deep into it to understand what it’s telling you. Find out what your customers want and give it to them.

7. Put your customers first

Too often, especially during tough times, businesses lose sight of what’s important. Daily “fire fighting” can lead to a situation where cost-cutting takes precedence over nurturing your customer base and meeting their needs. A solid customer experience is paramount for loyalty, referrals, and repeat business. 

8. Protect cash flow

Cash flow really is king when you’re a small business. In fact, 82% of small businesses fail due to cash flow problems. Instead of focusing on profits, prioritize cash flow management by ensuring you always have some reserves, collecting receivables as soon as you can, and extending payables.

9. Invest in the right people 

A small business is its people. So having the right people in the right positions is invaluable. Not only does it mean you’ve got the talent you need to get the job done, it also means you can concentrate on your role rather than trying to oversee skills gaps. 

10. Invest in the right technology

Beware technology for technology’s sake. However, staying abreast of the evolving technology landscape can help you find efficiencies and automate processes within your operations that could give your business a valuable competitive edge. 

Learn more: Strategies For Business Survival During A Recession

FAQ

What is a major reason why businesses fail financially?

Small businesses often fail financially due to lack of funding and/or cash flow mismanagement.

What percentage of businesses fail in the first 5 years?

Data from the US Bureau of Labor Statistics shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years.

Why do so many small businesses fail?

Small business failure is caused by a number of factors, which usually include lack of capital, marketing or market problems, poor business planning, and human resource issues.

What are 5 reasons businesses fail?

5 major reasons why businesses fail are: 

• Failure to innovate or adapt

• Unsustainable business model

• Misunderstanding the market

• Not hiring the right people

• Lack of business focus or planning