Business Failure Patterns in the United Kingdom

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Table of Contents

Introduction
Why Businesses Do Not Survive
Most and Least Convincing Explanations
Conclusion
Reference List

Introduction

Entrepreneurs in the United Kingdom (UK), like all other regions of the world, experience business success and failure. However, these outcomes depend on different factors, some of which are specific to an organization, while others are relevant to the industry in question (Caruana et al., 2021). According to the UK Department of Business Innovation and Skill (2021), there are close to 6 million small businesses registered in the UK. These enterprises play an important role in bolstering the country’s economy because they employ about three-fifths of the nation’s overall workforce (Department of Business Innovation and Skill, 2021).

The SME sector also generates a turnover of around £2.5 trillion, which accounts for 52% of the total turnover in the UK (Department of Business Innovation and Skill, 2021). These figures show that the Small and Medium Enterprises (SME) sector plays a significant role in promoting the economy of the UK.

Despite the importance of the SME sector to the UK economy, recent statistics suggest that 60% of all small businesses will fail within their first year of inception (Accounts and Legal Consultants Ltd., 2018). These statistics suggest that the success rate of small businesses in the UK decreases from 91% in the first year to 40% in the fourth (Accounts and Legal Consultants Ltd., 2018). This change in performance represents a decline in the success rate of small businesses throughout their business lifecycles.

The poor performance of small businesses is further affirmed by an increase in the number of business closures, which happened during the 2018 – 2019 period when there was an increase in the number of business closures from 311,000 to 336,000 (Office for National Statistics, 2021). These findings suggest that small businesses have a failure rate of about 11.26% annually in the course of a five-year business lifecycle (Office for National Statistics, 2021). In this paper, the main causes of business failure in the UK are investigated and ranked according to their merits.

Why Businesses Do Not Survive

Family Involvement

The involvement of family members in the running of small businesses in the UK is one of the major causes of the failure of small business enterprises. Particularly, this reason is the main cause of business failure among enterprises run by migrant communities in the UK (Camfield and Franco, 2019). For example, a study by Hack-Polay, Igwe, and Madichie (2020) attributed the main reason for small business failure among migrant families from Sub-Saharan Africa living in the UK is the involvement of many family members in the enterprise. The argument advanced to support this narrative suggests that the multiplicity of views from different family members on how to run a business impacts organizational leadership by creating confusion and frustration among some members (Kolk and Rivera-Santos, 2018). This problem creates conflict and inefficient operational systems that lead to declined performance.

The correlation between family-run businesses and high rates of small business failure has been explained by the institutional theory, which suggests that the involvement of family members in the running of such enterprises contributes to the development of prejudices, biases, and nepotism (Bilal, Fatima and Imran, 2020). If left unchecked, this environment creates a toxic atmosphere where business goals and practices are skewed towards fulfilling the wishes of specific groups of family members or factions of it at the expense of developmental goals. In the end, the business will be endearing only to a cultural group that shares the same norms and attitudes as the owners, thereby making it less appealing to a bigger audience (Hack-Polay, Igwe, and Madichie, 2020). This weakness limits its growth and development, thereby leading to underperformance.

The involvement of family members and kinships in business draws attention to the resilience of small enterprises to social networks and familial relations that have hampered business performance for years. For example, there is an inverse correlation between the vastness of an entrepreneur’s social networks and the performance of their small businesses (Herbane, 2020). This relationship has been attributed to changes in organizational resilience that are affected by perceptions of how managers and other business stakeholders view environmental factors impacting business performance (Hack-Polay, Igwe, and Madichie, 2020).

Location attributes have the biggest impact on business resilience because data from 268 SMEs showed that businesses located in one park had a higher level of resiliency compared to those that were not operating in such a setting (Herbane, 2020). In this regard, the involvement of other players in the SME model has a significant impact on business success. Specifically, this analysis draws attention to the use of a place-based approach in predicting organizational success or failure.

The role of family involvement in exacerbating the failure of small business enterprises has also been linked to poor management practices at the administrative level. For instance, the lack of diversity in the board of management of many SMEs is one of the main impediments to the development of sound corporate management policies in the SME sector (Uhlaner et al., 2020). Particularly, the failure to include outside views in board meetings has been singled out as one of the main sources of ineffectiveness and redundancy in thought, which hampers the ability of small businesses to grow effectively (Uhlaner et al., 2020). Therefore, the existence of a monolithic way of thinking in small business development is one of the reasons for their high failure rate.

Lack of Capital

The lack of adequate capital has hampered the performance of some small businesses in the UK, thereby making them vulnerable to environmental and systemic shocks. Unlike large corporations, small businesses have a relatively smaller financial buffer that could help them to endure periods of financial uncertainty (Hack-Polay, Igwe, and Madichie, 2020). Comparatively, large organizations can insulate themselves from market shocks for a longer time than their smaller counterparts are capable of, thereby increasing their probability of success. However, smaller businesses without a line of credit are easily vulnerable to market shocks due to limited capital.

The lack of investment cash for small and medium-term investors has been partly caused by new structural adjustment policies by commercial banks, which have seen them avoid lending to SMEs (Owen and Mason, 2017). Instead, they are focused on large and established enterprises because of their vast cash reserves and verifiable credit history (Owen and Mason, 2017). This practice has created a gap in funding that has primarily affected small business performance. Particularly, those that are less than two years suffer acute capital shortages because credit lending institutions avoid lending to them.

In the UK, angel investors and co-investment groups have ventured into the credit market to fill the existing lending gap in the SME market because of the importance of capital in helping businesses to scale their operations (Owen and Mason, 2017). Most of these co-investment groups provide small and medium-term business loans of between £500,000 to £2 million (Owen and Mason, 2017). This means that they only serve a small percentage of firms that need investment capital because they exclude those whose capital needs fall outside of the stipulated group.

Poor Business Management

The adoption of ineffective business management practices is also a significant contributor to the failure of small businesses in the UK. Particularly, most entrepreneurs who experience business failure because of this reason attribute their missteps to the adoption of ineffective strategies for growth and development (Antcliff, Lupton and Atkinson, 2020). For example, using the resource-based view of managing organizational resources to analyze longitudinal data from various small businesses in the UK, small business owners have been accused of seeking knowledge on how to manage their businesses as opposed to strategies that would make their business successful (Antcliff, Lupton and Atkinson, 2020).

Particularly, the failure of small business owners to seek human resource support during periods of growth is one of the main reasons for their failure, especially in the UK (Antcliff, Lupton and Atkinson, 2020). This outcome is feasible because the inclusion of human resource (HR) support gives it dynamic capabilities for managing different macroeconomic influences on the operations of a business.

The relationship between the failure to seek the right support and high rates of small business closures is supported by the dynamic capabilities theory, which suggests that businesses need to expand their capabilities during growth (Antcliff, Lupton and Atkinson, 2020). Failure to do so would stretch its limits and cause a strain in the management of business operations. Relative to the need for businesses to be agile, small enterprises have been linked to low levels of adaptability to their business environments, regardless of the time they have been in operation. For example, in some places, small businesses located in flood-prone areas are not equipped to deal with the same risk for several years after being exposed to it (Harries, McEwen and Wragg, 2018).

The reason given for the low level of adaptability was the limitation that local identities and organizational structures had on a business’s capability to respond to external shocks (Harries, McEwen and Wragg, 2018). This example suggests that small and medium enterprises are more vulnerable to market and business forces compared to larger organizations.

The strategies chosen by an entrepreneur to communicate business failures may also affect the future success or failure of a business. For instance, those that are poorly managed have little or no chance of being reviewed, while those that are prepared to manage uncertainties well have a greater possibility of being reviewed (Kibler et al., 2021). This statement stems from studies, which have highlighted the importance of managing failure as a determinant of future business success (Kibler et al., 2021). They opine that the potential negative implications from failure can be mitigated if entrepreneurs create a general background of acceptance for it, such that when the business collapses, its shareholders better manage or cope with the eventuality (Kibler et al., 2021). This type of planning makes it possible to revive a business or not.

Most and Least Convincing Explanations

Most Convincing Explanations

The involvement of family members and kinship relationships in business has been highlighted as a major cause of business failure. In this paper, this reason is ranked as a convincing argument explaining small business failure in the UK because most SMEs have been struggling to detach from such family relations as a determinant of business success (Bika and Frazer, 2020). This trend started in the 1980s when many family-run firms realized that their kinship connections were detrimental to their success (Bika and Frazer, 2020). Consequently, most of them restructured their operations to reflect elite networks as opposed to family connections as a determinant of business success.

This is why, today, the success of most small business enterprises in the UK are defined by business networks as opposed to family connections. Given that this change has happened at a national scale, there is merit in arguments highlighting kinship and family relationships as one of the biggest causes of small business failure in the UK.

Existing research evidence also indicates that business performance follows the gender divide, especially when evaluating the performance of small and medium enterprises. For example, women-owned enterprises have suffered high rates of failure compared to male-owned firms (Manolova et al., 2020). The effects of the COVID-19 pandemic reinforced this outcome because female-owned businesses reported more closures compared to male-owned enterprises (Manolova et al., 2020).

The difference in outcome between both sets of enterprises highlights the role of social differences in influencing business performance. Family and kinship ties are closely linked to the same outcome because the pattern of SME closures in the UK follows both sets of entrepreneurs (Höllerer et al., 2020). The commonality in business outcomes necessitates the importance of delving deeper into understanding the causal factors explaining high rates of closure for women and family-run small businesses.

Additionally, in this paper, it has been demonstrated that small businesses have relatively lower financial resources compared to multinational companies. Consequently, they are more vulnerable to financial and market shocks, which could make them close down indefinitely. Given that the COVID-19 pandemic has exposed the extent that such market weaknesses could have on business performance, lack of capital has been included in the list of factors that contribute to the failure of small businesses (Ertel, 2021). Stemming from this categorization, limited financing is also categorized as an important cause of failure for small businesses because of the extent of government involvement in addressing limited capital as a significant impediment to the success of small business development.

For example, the UK introduced the Enterprise Capital Funds to aid small businesses in getting capital to meet their short-term and medium-term goals (Baldock, 2016). On a broader scale, governments around the world have lent money to small businesses by giving them a line of credit to overcome the effects of the COVID-19 pandemic on their business (Ertel, 2021). These collective efforts by government agencies and some financial entities to help raise capital for small businesses demonstrate its importance in supporting the growth of the SME sector. Consequently, the lack of capital emerges as an important reason to explain the failure of small businesses in the UK.

The growth and spread of the informal capital market as a source of short-term debt financing for SMEs also emphasizes the importance of debt financing to small businesses. In the UK, the industry thrives in certain sections of the market, such as South England and London (Cowling, Brown and Lee, 2021). Additionally, there is a localized trend of investment in these regions where high net worth investors choose to inject capital in projects that are locally owned or will benefit the local SMEs (Williams and Needham, 2016). Differences in investment patterns and behaviors across different jurisdictions suggest that there are disparities in the sources of entrepreneurial finance in the UK and SMEs are the most affected.

Least Convincing Explanations

Poor management was mentioned as one of the reasons for business failure in the UK. However, this reason is subjective to the organization or market in question, thereby informing its low rank in the list of convincing reasons for SME failure in the UK. This is because countries have different management behaviors that are moderated by external market forces – some of which may be beyond the control of a business or sector (Jaklič et al., 2021).

For example, while researchers have focused on understanding business performance by measuring key performance indices, another group of researchers claims that a person’s entrepreneurial spirit has a significant role in impacting performance (Wynn and Jones, 2019; Solberg et al., 2021). This statement is true in small businesses where the success of a business could be tied to the personality of the owner. Therefore, the argument that poor performance is a reason for the high rate of failure among SMEs is undermined by the fact that intrinsic factors could be tied to poor performance in the first place (Short et al., 2016). Given that small businesses experience unique challenges affecting their growth and development, compared to multinational organizations, poor management emerges as the least convincing reason.

The involvement of external parties in small business management also undermines the credibility of the reasons for ranking poor performance as one of the causes of small business failure. Relative to this statement, governments around the world have been supporting SMEs directly and indirectly. For example, the UK and US governments provided a Coronavirus relief fund to aid struggling businesses in paying for their utilities (Clampit et al., 2021).

This type of financial aid negates the power of management practices because such a financial aid package levels the performance of such enterprises. Broadly, governments have been involved in the funding of business enterprises, including non-profitable ones (Kourula et al., 2019; Clampit et al., 2021). The merits and demerits of adopting such an approach have been debated extensively (Sa and Chai, 2020; Kalé, Harland and Moores, 2020), but its effects on management practices cannot be ignored. In other words, government assistance plays a significant role in determining the quality of management for a business or a sector of the economy.

The limited role of poor performance in dictating the success of small business enterprises is also informed by varying goals that businesses share. For example, some organizations strive to maximize shareholder interests, while others are meant to promote a non-monetary goal (Hernández and Muñoz, 2021). This variation in business objectives makes it difficult to use one benchmark of organizational performance to evaluate reasons for business failure. In light of this development, small businesses are being encouraged to adopt an ecocentric strategy to make them more resilient and adaptive to market forces (Hernández and Muñoz, 2021). This shifting diversity in goals means that poor performance is a weak reason for explaining the failures of SMEs.

Conclusion

This study has identified patterns of business failure in the UK by highlighting some of the main impediments of small business growth. The lack of adequate financing, poor management, and family/kinship connections emerged as the most notable reasons for understanding patterns of business failure in the UK. The lack of capital and family relationships emerged as the most convincing reasons for small business failure because limited financing and changes in business structures, which have occurred over the years, suggest that the two reasons have influenced growth for years.

The least convincing reason for the failure of small businesses was poor management. Although there are differences in management outcomes between small and established organizations, this reason did not emerge as a formidable one, given that small businesses have unique challenges impacting how they operate. Therefore, poor performance is a subjective concept and does not merit to be highlighted in the same category as the lack of capital or kinship ties.

Overall, small businesses in the UK suffer several challenges related to their growth and development, but the lack of capital and kinship relations have emerged as being the most notable reasons for their failure. To overcome these challenges, greater emphasis should be made to minimize the inequalities that exist in small business financing in the UK. This approach would better streamline financing operations and decrease the impact of private investor funding on business operations. The risk posed by private investments in business operations is akin to the risk posed by family connections and relationships in the running of business operations. In both instances, the needs of the business may be substituted for those of the owners of the enterprise. In such an environment, growth is stifled and the development of the enterprise constrained. Therefore, these risks need to be minimized by replacing the family management structure with a professional one.

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