Business failure rates: why do so many small businesses fail?

Reviewed for 2018

Thousands of small businesses fail to survive past the first few years - here's why.

Scrutinise the stats on small business survival and you’ll probably come away pretty depressed. According to the last ONS study into the area, only 44.1% of startups survive beyond five years, whilst a recent study by the insurer RSA suggests that 55% will fail to make their fifth birthday.

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Troubling stats suggest that going it alone isn’t going to be easy and building a long-term and lucrative business is fraught with difficulties. What are the challenges then? And why are so many small businesses struggling?

The cash flow killer

Successive studies point to the problems poor cash flow can bring, typical figures suggesting that around 80-90% of small businesses fail because of bad cash flow. Essentially the art of balancing your outgoings with the amount of cash coming in, time and time again the expenses outweigh the inflows and send small businesses to the brink.

A chronic late payment culture isn’t helping, with delays of over two months now common, and a recent study by Bacs suggests that late payment is costing SMEs £2 billion every year. That said small businesses aren’t always blameless and some sow the seeds of their own demise, over optimistic spending and flawed financial planning putting them in trouble.

Tricky tax and reams of red tape

According to the FSB over half of small firms believe that the tax system is bad for business, with 60% shelling out an average of £3,000 a year to demystify their responsibilities. Elsewhere there’s evidence that new legislation is causing chaos for many, recent changes to EU VAT rules damaging thousands profitability.

Add to this red tape — which 33% of you told us "hindered your business" — and it’s clear that current small business policy doesn’t always make life easy. Whether the government’s Red Tape Challenge improves things remains to be seen, as the way things stand the current legalities look to be making survival tricky.

Backwards to the future

The latest figures from the ONS suggest that 89% of British adults used the Internet everyday. Despite this a raft of small businesses still aren’t on the web, figures from the Department of Business, Innovation & Skills suggesting that up two million have no online presence.

To make matters worse the same study suggested that more than half of the public - 55 per cent - find it more difficult to support local small firms because often these businesses aren't online. Without one it’s clear that British businesses are missing out on sale after sale, intensifying challenge number one – achieving a healthy cash flow.

It’s a complex topic so we’d love to hear your thoughts. Why do you think so many small businesses struggle? Let us know in the comments.