So you've had a great idea for a business. You've done your research and you've set up your home office. But now what? How do you make it through year one? How do you make it to years three and five without becoming just another statistic on how many companies fail within their first years of trading?
Anyone can launch half-baked business idea
Have you ever wondered how many businesses are registered in the UK? And how about how many of those are active businesses?
The UK private business population has almost doubled in just under 20 years, growing from about 3.5 million to 5.7 million since 2000.
Most of these private sector businesses do not even have employees. This number, too, has grown since 2000, whilst the number of businesses with employees has remained stable. This means the majority of businesses launched remain one-man-bands.
Entry is easy, survival is not
As Geroski stated in the mid 90s, “entry is easy, survival is not”. It is a well-known fact – and a threat that many new entrepreneurs face – that most businesses won’t make it past their fifth year.
Some industries are more at risk than others, though. The highest death rates, in fact, can be seen among companies in financial services, accommodation, food and business services. The lowest is among arts, entertainment, recreation and property.
Around 20% of active firms are in professional, scientific and technology services, 20% in construction and 20% in retail and wholesale.
Generally, as with any form of life, business death is in great part a matter of time.
Of 250k-350k businesses started each year in the UK, most (87%) make it through their first year. After three years this drops to 55-60%. After five years only 41% are still going and after fifteen years only about 10% of businesses survive.
According to Head (2003) 50% of businesses fail before their fifth birthday. If they are playing in dynamic markets, this tends to be earlier, by their third birthday (Burke et al, 2008).
So the ones that make it through their first years are winners, right?
No, not really. According to the stats, the highest performing businesses are those that have successfully managed to grow their business out of the SME zone. Whilst the abundant small business demographic produces about 36% of total private sector turnover, the fewer, larger companies account for 48%.
So simply making it past the five year point is not a marker of success, so no resting on your laurels. How you manage and grow the business will ultimately determine its performance. Survival alone won’t cut it.
Why do companies fail?
There are a number of reasons companies fail within their first years of business. Here are eight common ones:
- Technology doesn’t work
- There is no market gap
- Inadequate business model
- Don’t know when to say no
- Lack of finance and financial discipline
- Lack of leadership
- Poor management
- Ineffective team
Have you got the psychometric traits of a successful entrepreneur? Find out now.
How to make your business more resilient
According to research, your first year can be a good indicator of whether your business is set up for survival or failure. And contrary to what you might think, having a difficult first year is actually a positive sign. Making it through year one, facing challenges, competition and solving problems, means being better equipped to face subsequent years.
Having an easy year one, however, might be a sign of trouble to come.
Top was of maximising your chances of survival
So, what can you as an entrepreneur do to raise your likelihood of developing your business into a strong, thriving enterprise? Here are our top ways of preparing your business for a long and healthy life:
- Sell a niche or highly differentiated product or service
- Know your competition and have a constant finger on the pulse of the market
- Know the numbers and exercise strict financial discipline
- Build a strong team, develop them, retain them
- Create a clear customer segmentation
- Have crystal clear business plan and stick to it
- Keep the passion for your business alive
- Have clear company values and culture – know who you are
- Make your customers feel loved
As an entrepreneur, it can be easy to fall into the mindset of needing to "work harder" and taking a "no pain, no gain" approach to business. What we actually find is that what you need to be focusing on is working "smarter", taking a step back to work on your business rather than getting constantly caught up working in it.
At Cranfield School of Management, we have over 30 years’ experience working with growing businesses and have in depth knowledge of what makes a business successful. Learn more about how we help businesses to achieve their objectives here.