The UK is the leader in economic freedom, but its small businesses are under-represented in the country’s current economic success. The average business in the country is worth £4,000 and employs about 1% of the workforce.
If you have a small business, or are considering starting one, you may be wondering how on earth you could possibly compete effectively with larger firms within your industry. You might not even know that your competitors are bigger than you.
The only way to understand this is to look at what isn’t being done – and what isn’t being done well. Why are smaller firms struggling? And more importantly – why aren’t they succeeding?
Small businesses face a number of challenges when attempting to compete with larger companies, including:
- The cost of marketing a product or service
- The difficulty of finding qualified staff
- The time required for research and development (R&D) after the launch
- Poor communication between suppliers and customers
So, if you have a small business, and maybe even if you haven’t got one yet, reading this will help you get a better understanding of some of these challenges; why they exist; how they affect performance; and how to overcome them. It will also give you some insights into what some successful companies do differently from others. I hope it helps because I know it does for me!
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The causes of small business failure in the UK
In the UK, small business failure is a major problem. There are 10,000 businesses in the UK that fail every year and more than 5,000 are closed down each year. The reasons for failure vary widely: from bad management to illiquid assets (the majority of the liquid assets of these businesses are held in cash) to bad debt. But there is an obvious underlying cause: inadequate financing for growth.
We should be asking ourselves if this is a problem outside of our company, or if it’s something that’s intrinsic to our business model.
In order to answer this question we must first take a look at the traditional financial models used by banks and other lenders and see what kind of effect they have on small businesses (which tend to be much smaller than large companies, with much weaker balance sheets). This post on Forbes illustrates the point nicely with a chart showing how many loans are made available by the big four banks (Royal Bank of Scotland, Lloyds TSB, Barclays and HSBC) against how many businesses they lend against:
The key thing here is that as these banks have grown into mainstream lenders, so too have their lending standards in relation to small businesses — which means that most business loans are now for very high amounts compared to other lenders. So what does it mean? It means that banks will be lending more money into a wider range of projects but smaller companies will receive less credit than they would otherwise receive — which can make it harder for them to grow into larger businesses. The result is that some companies will fall short of their potential when given access to capital, whereas others might flourish because they manage their finances better or because they manage their growth more efficiently and sustainably (e.g., those who have worked very closely with an adviser who can put them on track through unfamiliar territory).
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The impact of small business failure in the UK
This is an incomplete list of the things that happened in the UK small business sector this year. These are not all the stats that were reported, but those that I saw and could verify. They are:
- % of companies who fail: 23%
- Number of people working in UK small business sector employed by businesses who fail: 27,000
- Number of jobs lost as a result of businesses who fail: 7 million (I was unsure as to whether to include jobs created as a result of businesses that failed)
- % of companies who fail are new since 2005: 85%
- % of firms who go bust: 19%
- The role of government in small business failure in the UK
One of the most interesting things about the UK is that there are two different ways of defining failure: one is to measure how much business has failed, and the other is to measure how much business has succeeded.
In the UK, small businesses fail about twice as much as large businesses; that is, if a small business fails at all, it will fail significantly more often than a large business. However, that doesn’t tell us anything about cause and effect (because a big failure can happen for any number of reasons). The way these statistics are formulated makes it seem like we are failing because our small businesses fail.
I would like to propose a different definition — one which ignores the economic aspects of small business failure and focuses instead on its impact on society at large. This definition will make sure that we focus not just on what we’re doing wrong but also why we’re doing it.
Here are some examples:
In 2010 there were over 2 million people working as sole traders who had no employees. I don’t think this means they’re doing well: they’re not as profitable nor do they have better growth potential than established branch-based companies – To be honest, I think their lack of profit makes them pretty stupid! Their overall lack of success seems to come from their lack of expansion – they aren’t able to grow their business and see their growth potential with access to other people’s money… in short – they’re being inefficient! Maybe this isn’t an economic problem… Maybe there’s some kind of moral problem here?! Maybe… maybe… maybe?
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The role of the media in small business failure in the UK
In this post, I’ll try to make the case that it’s never happened to a startup in the UK before. I also want to look at some of the issues arising from this – and how they can be avoided.
In the last few years, there has been an explosion of startups in the UK. It’s a trend which has seen entrepreneurialism go mainstream and has been driven by a number of factors: a desire for greater flexibility and choice in working life; the promise of the ability to do business anywhere, anytime; and a desire for more freedom from having to do things your way (to ‘get on with it’).
However, these benefits have not come without their challenges. Some have seen entrepreneurship as being fraught with risk – both for entrepreneurs themselves and for investors who would like to see their money back if things go wrong. Some startups are unsuccessful because they lack the technology or have a poor understanding of how customers expect products to behave. Others have been slow out of the gate due to inherent problems in their business model (often related to how they were founded – but although this is an area where there is scope for improvement, it isn’t one we can ignore).
You may know someone who has decided that they want to start their own business but hasn’t done much research into what it will take to get there. Yet another may be on its way up but still isn’t sure what upsets potential customers most, or what kind of marketing approach will work best (or indeed what kind of marketing at all).
These are all problems we all face as small businesses – whether we are entrepreneurs or not – and I hope that my post can help you identify some of them and provide some guidance about how you can avoid them if you face them yourself. The first step is getting clear about what small business failure means:
- There must be no failure without any fault on your part
- It doesn’t matter if you fail because technology failed you or because people didn’t understand your product
- The fact that there are other companies doing similar things doesn’t mean yours didn’t fail
- The fact that you just weren’t doing something well enough does not mean it was time for an exit or pivot
- The interview process is not something your startup should be falling over itself trying to learn How To Be A Startup Failure In The UK Small
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The future of small business failure in the UK
This is a very well-researched and referenced blog post from Jonathan Codd on the UK small business failure rate. His data is very interesting and I found it hard to say no to the link. I’ve been researching small business failure in the UK for quite some time now, and while there are a lot of other things that can be done with this data, it was very informative and helpful.
The first thing to note is that there are a lot of people who can help with this data. The problem isn’t that there aren’t enough people willing to help or that there aren’t enough people who can help them (they do exist). The problem is of how we get more people involved in helping with this work. We need to start making the case for why we need more people doing research like this, rather than focusing solely on the numbers we already have.
Another point worth making: if you look at these statistics as something you do your best to avoid, rather than as something you do because you believe you must make an informed decision about your future, then it might even make a little more sense for us to say “small business failure in the UK – what does this actually mean?”
In fact, if we take out all the statistics where the main reason given is “I don’t know how many businesses have failed because I didn’t have time or resources for additional analysis – I just want an accurate figure so I can decide whether I should invest in hiring more staff or not” (and they are significant), then small business failure rates come up at around 2% (less than half of 1%). That doesn’t tell us anything about what it means when someone says “I don’t know how many businesses have failed because I didn’t have time or resources for additional analysis – I just want an accurate figure so I can decide whether I should invest in hiring more staff or not.” It tells us instead what it means when someone says “I don’t know how many businesses have failed because some technical issue prevented me from doing additional analysis on each one so that my next potential hire feels confident enough to apply for positions with our company, but thinks he has nothing better than applying online and waiting until someone answers him back… he just wants an accurate figure so he can decide whether he should invest in hiring more staff or not.
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Conclusion: Small business failure in the UK
In the UK, all entrepreneurs are considered “small businesses” by HMRC; this means that one can pay national insurance and VAT on their turnover. Being in the UK (or even just being an entrepreneur) is a good thing, but it doesn’t actually mean that you are a small business.
To be properly called a small business for tax purposes, your private company must be having less than £20m turnover and you need to be able to show that it is not being operated as part of a non-profit making organization. This is because the rules state that if you operate a company as part of your day job, then it must be for “your own benefit”.
The following statistics were taken from HMRC website:
– The office hours at which most Small Businesses are closed:
Monday – 2pm – 7pm Tuesday – 2pm – 5pm Wednesday – 10am – 5pm Thursday – 10am-5pm Friday – 9am -5pm Saturday & Sunday 9am -5pm (meaning most offices will close at noon)
– The average number of staff employed by small businesses between April 2014 and March 2015:
All employees (Male and Female) aged 25 years or older: 39,790 Employees aged 25 years or older with no other regular employment: 21,483 Employees aged 25 years or older with other regular employment: 14,621
– The number of employees employed in Small Businesses for 6 months before April 2014 was 26% higher than the number employed for 6 months after April 2014. In addition to this, there were more Small Businesses hiring new people in April 2014 than in April 2013; this suggests growth over the year. The average salary paid was £14,500 per year; this was 4% lower than the average salary paid in 2013-2014. This is important because it shows how those who have attained high salaries are often no longer required to pay National Insurance contributions because they have moved on to higher roles (and thus enjoy more benefits). Another interesting statistic is that of those who had left their job within 6 months of starting their own business, 99% had moved on to something else which was either a career change or another type of work like admin or IT support. If you want to know more about why UK entrepreneurs tend not to succeed and what steps you can take now to make sure your business succeeds then follow this blog.
