Why do businesses fail – and how can HR help?

Learn the 5 main reasons why businesses fail and how HR can help you succeed with this guide from HR consultant Kate Marchant.

According to statistics, the majority of new businesses fail within their first 5 years. Data from Companies House suggests 80% of UK businesses fail within their first year. And, let’s face it, running a business isn’t easy - it’s very challenging!

In this article, we will examine some of the reasons businesses fail and whether a lack of HR can contribute to, or be blamed for, the failure of a business.

5 reasons why businesses fail

There are many reasons why businesses fail, here are a few of them:

1. Lack of a business plan

Fail to plan and plan to fail… and all that. Well, it’s true. Jumping straight into things without any kind of plan can have disastrous results; at the very least you need to have a plan outlining who you are, what you do and how your business works. So, for example, you’ll need to plan for:

Business objectives and goals
Employees and structure
How you are going to market your business
How you will keep abreast of competitor activity
Finances

2. No structure

Business owners need to understand what structure their business will have, which is usually one of the following:

Sole trader – this is usually a one-person business, a structure often used by trades people eg. electricians, plumbers, hairdressers etc.
A partnership – like a sole trader set up but usually involving more than one person.
Ltd company – this is a company that has its own legal identity and has more protection than being a sole trader.
Limited liability partnership – a mixture of a partnership and limited liability company.
Public Ltd company – this is a limited company which can sell shares or debentures to the public. Often, this a structure to consider after the passage of time as opposed to the outset of the business.

3. Poor leadership

Leadership, especially good leadership, is of vital importance to the successful running of any business that employs people. A good leader will engage with and motivate their employees to work well and develop themselves. They lead by example and live the values they promote. A poor leader can create a toxic workplace with a lack of trust, be prone to micromanagement, and lead to a blame culture – all of which will likely give way to a mass exodus of employees.

4. Lack of market research and marketing

Not carrying out due research into the industry a business operates within, its target market, and competitors can also lead to business failure. Understanding your market and where your clients ‘hang out’ can form the basis of an effective marketing strategy, including being aware of what your competitors are up to.

5. Not hiring the right people

Understanding the skills you need to bring into the business is very much the key to success, but even more so is bringing in people whose values align with those of the business and whose behaviours reflect those values.

How can good HR stop your business failing?

Whilst it is clear a business can fail for many different reasons, can a business fail due to a lack of HR? The likely answer is ‘maybe’, but let’s turn things on their head and look at how HR can help a business succeed:

Recruitment and hiring the right people

HR can help you understand the skills and experience you need to bring into the business and where you might look for the right talent. Furthermore, HR can help you attract the talent you want to bring into the business by assisting with job adverts and role profiles, ensuring the language is diverse and inclusive so you have as wide a talent pool as possible to recruit from.

Employee engagement

HR can help you get the right strategy in place to support and increase employee engagement – one that works for your business and responds to the needs of your employees. Increased employee engagement often leads to better and increased productivity, more committed employees, and reduced employee turnover. Where there is little, or no, employee engagement it can very often have a detrimental impact on the business and possibly contribute to its failure.

Performance improvement

HR can support the business to develop a performance management framework (PMF), which is relevant and appropriate for the specific needs of an individual business and its employees. HR also plays an integral part in supporting managers with the conversations they need to have with employees and how to give feedback. Now more than ever, employees want to understand how well they are doing and what improvements they need to make, and HR can help shape how this is done so employees get the information they require around performance.

Leadership

As already mentioned, poor leadership can lead to business failure. So, it is vital HR supports business leaders and steers them in the right direction when it comes to leading and managing their employees. HR needs to challenge poor leadership behaviour and encourage leaders to live and breathe the values and beliefs of the business, so the employees can see and feel what good looks like and, importantly, adapt their own behaviours to reflect those that are key to business success.

The above gives a flavour as to how HR can help a business succeed. A lack of HR may contribute to the failure of a business, especially where there is no strategy or presence to help support and develop the above key aspects; however, business failure is often due to a mix of factors, with a lack of HR being one of many.

Written by Kate Marchant

Kate Marchant is an experienced HR professional and CIPD Associate Member who offers straight talking HR solutions for SMEs with friendly and jargon free advice through her consultancy Running HR Ltd.