Why do so many SMEs fail within the first three years

We all understand and appreciate that Small to Medium Size Enterprise (SMEs) are the backbone of the British and now most International economies, however why do so many of these fledging businesses fail?

Following the latest survey performed by DropJaw Ventures of over 50 failed SME Founders, the following issues are being cited as their downfall and Ultimate failure of their businesses;

     1. Lack of funding and access to sufficient levels of working capital

          a. 95% of the founders of the SMEs interviewed claimed they could not access and or secure the amount of capital investment required to see their companies through to profitability

          b. The average start up funding requirement was less than £127,000 with over half of that being for salaries, 21% on research and development, the balance on general overheads

          c. Those who did secure funding, over 61% of the funding was raised by personal loans, credit card cash advances and or friends and family loaning funds to the founders.

          d. 22% of successful funding for start up SMEs came via angel investors under an EIS package. 12% of funding was secured via bank loans and or overdrafts. Around 5% was funded via regional growth funds or crowd sourcing

      2. Failure to generate and close sales leads

          a. 97% of founders admitted to missing their sales target by more than 50% during the first 12 months

          b. The average revenue forecast for an SME in the first year of trading was £197,00 growing to £475,000 in year 2 and almost £750,000 in year 3

          c. The use of outsourced and dependency on social media for generating sales leads was over 42% of companies with 51% preferring to keep costs down and generate their own marketing campaigns, all of which has a social media stream

     3. Failure to deliver projects and covert orders to cash

          a. Over 81% of all new orders were delivered late and over budget resulting in lower than expected margins with over 47% actually making a loss on their first three projects or orders

          b. 72% of SMEs admitted to loss leading first client projects/ orders confirm that the initial engagement did not actually lead to further busienss from that particular customer

     4. Burn out of the founders and senior level staff

          a. 34% of companies with more than one founder had lost at least one founder before the end of the first year of trading

          b. Staff Churn within the first 12 months was higher than year 2 and then increased in year 3. The swing was due to low staff moral, uncertainty around receiving their salaries and an erratic and unpredictable management style of the founders.

     5. Management Experience

          a. General business acumen and commercial naivety had a direct negative impact on over 47% of SMEs  who claimed that their poor decision making had led to costly and lengthly litigation with clients, staff, investors and suppliers

          b. Bad Debt, only 22% of respondents claim to have suffered a bad debt during the first 12 moths, which then increased to over 25% of companies who survived to year 3.

Any one of these issues are sufficient enough to bring a busienss to its knees, being impacted by more than one will almost certainly kill them off. The risk from most of these issues can be mitigated if not avoided all together through having the right approach, mentality and access to the valuable resources required to start and scale a business to profitability.

Further details and insights to successes are available by emailing info@dropjawventures.co.uk

Other news