How Many Businesses Fail in the First Year (and Why)

Starting a brand new business is equally challenging and rewarding. To turn your idea into a profitable reality, you must plan thoroughly and prepare for every scenario.

As profitable as starting a new company can be, research shows that a portion of UK businesses fail in their first year.

In the following sections, we show you how many businesses fail in the first year and explain what some of the most popular reasons are. This information can equip you with everything you need to stand out from the crowd, not only surviving in dynamic markets but also gaining a competitive edge over others. 

Business Failure Rates in the First Year

There are many studies on business failure rates. Because of the different research methods used, results can slightly vary from source to source.

Research from 2023 suggests that around 8% of businesses fail within the first year in the UK. 

Other surveys found that around 4% of new businesses have ceased trading by the end of the first year of operations. 

At the same time, roughly 60% of high-risk companies were found to be in the category “young”.

Of course, these numbers vary in different parts of the world. For example, in the U.S., 20.4% of businesses fail in their first year after opening. 

Industry-Specific Survival Rates

Naturally, the rates of new business failure vary across different industries and sectors. They can also vary across service-based businesses and product-based businesses.

Here are a few interesting insights on US companies that survive during the first year:

• 87.50% of businesses in agriculture, forestry, fishing, and hunting; 
• 80% of utilities businesses; 
• 83.90% of real estate and rental; 
• 84.20% of retail trade;
• 74.90% of information-related businesses; 
• 77% of professional, scientific, and technical services.

When it comes to service-based businesses, the one-year survival rates can vary depending on the industry. Estimated 2024 data from the US Bureau of Labor Statistics shows that around 18% fail during their first year of business, making the 1-year survival rate around 82%. 

However, survival rate percentages vary from 77% for professional, scientific, and technical services and span up to 82.50% for accommodation and food services. 

Survival Beyond the First Year

But making it beyond the first year doesn’t guarantee long-term success. 

46.5% of new businesses will fail within the first three years. At the same time, the five-year survival rate for UK businesses born in 2019 is 38.4%

Research from the U.S. shows that more than 65% of companies fail during the first 10 years. 

Common Reasons Why Businesses Fail

Why do so many businesses fail – not just in the UK, but globally?

Across all industries, small businesses often face the same common pitfalls. These recurring mistakes are a major reason many ventures don’t survive.

Financial Mismanagement

Access to funding is vital for any business, whether new or established, small or large. However, having enough money to cover expenses like salaries, product development costs, and marketing is even more vital for new companies.

Unfortunately, this is a serious problem shared by many new businesses. In fact, nearly 38% of startups fail because they run out of cash. 

Financial mismanagement refers to the inability to adequately track, plan, and control cash flow. It’s also a sign of uncertainty regarding losses incurred and therefore, adaptations that need to be made to pricing. 

Many business enthusiasts start with an exciting idea and a passionate mind. But without a solid understanding of finances, they can’t provide the one asset that your business relies on – money.

One of the most popular reasons for financial mismanagement is starting your business with insufficient capital. This could be a result of poor planning and market research, or simply a lack of access to resources. But cash flow problems can also arise after poor budgeting, overspending, or underestimating costs. 

Without a clear understanding of how much money is coming into the business, owners often face late payments, missed tax obligations, and money shortages that can pause or completely disrupt operations. 

Another common mistake that leads to poor financial management is neglecting to separate personal and business finances. This blurs the company picture and makes it impossible to make informed decisions. 

The good news is that you can help prevent this by creating a business bank account and implementing service POS systems, for example, to track sales, monitor inventory, and receive real-time financial reports. 

Poor Market Research

The second biggest reason so many businesses fail is the absence of detailed market research.

Research shows that 35% of startup businesses fail because there’s no market need for their services or products. This is a clear indicator that the market wasn’t properly analysed and examined.

Before registering your company and starting to trade, it’s fundamental that you invest time and resources to fully understand your market. 

This process should help uncover the following:

• Who is your target audience?
• What are your customers’ pain points?
• What do your potential clients need?
• How much are they prepared to spend?
• What market conditions and trends can affect your positioning?
• Who are your competitors?
• How are your competitors selling their products and services, and at what prices?

All of this information is vital for entering a new market and positioning yourself competitively. It will help you establish a clear and data-based strategy, guaranteeing that there’s room for you in the niche you’ve selected. 

Companies that operate without market research enter the business maze blindfolded, doomed for defeat. 

Ineffective Business Planning

Historical data reveals that 19% of startups failed because they lacked a business model. This mostly stems from one core mistake - many small businesses fail because of the absence of a clear and realistic business plan. 

Creating a business plan before starting a business isn’t mandatory. 

However, it’s an essential part of planning details around the following:

• Your legal structure;
• Your target market;
• Your value proposition;
• Your products and services;
• Your sales and marketing strategy;
• Your pricing structure.

The business plan acts as a roadmap and helps owners set the frameworks around key processes for running and growing their company. Not to mention that it’s also a powerful document that can be presented in front of potential investors, helping secure external funding.

In essence, a lack of planning isn’t just about failing to forecast the future, it’s about failing to prepare for it. 

Marketing and Customer Acquisition Failures

Gaps in marketing, which lead to high customer acquisition rates, are also a common reason why new businesses fail.

Imagine that you have created the perfect product, which solves a popular problem in a certain niche. However, you’ve underestimated the importance of creating a marketing strategy, and you’re now counting on the power of chance to achieve sales. 

Although this sounds like an uncommon scenario, the truth is that a lot of new businesses start with low or no budgets for marketing. This leads to the finding that 14% of startups failed because of poor marketing.

Oftentimes, marketing is performed in-house by an employee who is also tasked with several other business roles. Naturally, this is all designed to save money, yet it’s only leading to more business losses and the inability to attract customers. 

To cover your expenses and start making a profit, it’s fundamental that your marketing strategy attracts new clients and that your customer acquisition costs are low enough to generate revenue. At the same time, customer retention (another underestimated component) can help ensure ongoing profits with zero acquisition costs.

Operational Challenges

Operations are another area where companies fail. 

Even the best business idea can turn into complete chaos if it isn’t executed properly. In most cases, operational challenges arise from inefficiencies in day-to-day management, poor systems, and a lack of scalability as the company grows.

Think about things like poor team dynamics, hiring mistakes, logistical problems, and even the inability to adapt to market changes.  

At their core, operations are about turning plans into performance:

• Managing people; 
• Optimising processes;
• Tracking inventory;
• Communicating with suppliers;
• Improving customer service.

Even if one of these areas breaks down or underperforms, it affects every aspect of business. In most cases, the problem derives from inefficient use of systems, like order fulfilment, stock management, and scheduling. 

For instance, retail and service-based businesses that rely on outdated or manual methods frequently struggle to keep up with orders, track sales, and manage staff shifts. 

Lessons from Successful Businesses

To prevent falling victim to the common pitfalls businesses face, it’s crucial to learn from successful businesses. 

Importance of a Strong Business Plan

As noted above, failing to plan on time and according to market conditions and customer needs can be detrimental.

Behind every successful company is a well-structured business plan that goes beyond ideas. It provides a comprehensive plan and acts as a roadmap for decision-making. But the business plan isn’t just about outlining the core sections. 

What separates a successful business plan from the rest is realism. Companies that have the ability to grow and avoid failure in the first years create detailed financial projections that take into account revenue fluctuations, expenses, and future investment needs. This allows them to manage cash flow strategically and have a plan B for slow seasons of unexpected market conditions. 

Another key area is market analysis. Thriving businesses fully understand their audience, competitors, and industry trends before launching. They identify gaps in the market and tailor their products or services to meet real customer needs instead of simply assuming demand exists. 

Adapting to Market Changes

Today, the business landscape is evolving faster than ever. This means your adaptability will determine whether you succeed or fail in your first years as a business owner. Companies that survive and gain a competitive advantage are those willing to pivot when market conditions change.

One example is Netflix, which started as a DVD rental service. The company quickly shifted to streaming as digital consumption increased. In a similar way, small retailers that embraced e-commerce during the pandemic discovered new ways to reach customers, even when physical stores were closed. 

The best way to identify new ways to adapt is to closely monitor the market and collect as much customer feedback as possible. Oftentimes, your potential or existing clients can provide all the right answers via reviews, surveys, and even social media interactions. 

Building a Resilient Team

Another insight we can gain from successful companies is that having the right team is incredibly important for business survival. 

Labour statistics and market research suggest that 14% of startups failed because they didn’t have the right team running the business. 

On the other hand, companies that manage to build effective leadership, open communication, and invest in employee training and development can confidently launch new products or services, expand to new markets, and build a significant customer base. Most importantly, businesses with reliable employees can afford to explore new strategies and techniques, knowing that they can count on full support.

Not to mention that engaged employees are more likely to contribute to creative ideas and take ownership of results. 

How to Avoid First-Year Failures

Now that we’ve uncovered the most popular reasons for business failure in the first year and we’ve explored how successful companies avoid this, let’s summarise what you can do to prevent failure as a new company:

Conduct Thorough Market Research

Before launching your product or service, make sure you’ve conducted in-depth market research. 

Although this process is multi-layered and extensive, we recommend concentrating on the following:

• Define your ideal customer profile - find out who your target customers are by considering things like age, gender, location, income level, occupation, and interests. Go one step ahead of demographics and dive into psychographics, analysing things like values, motivations, and lifestyle choices.
  
• Invest in surveys and customer interviews - communicate directly with your audience and send out short online surveys, polls on social media, or face-to-face interviews. You can use tools like Google Forms, SurveyMonkey or Instagram story polls to collect this valuable information.
  
• Analyse data from your customers - if you have any existing data from clients, use it to identify buying patterns.
  
• Monitor your competitors - gain as much information as you can on your direct competitors to find out what’s working in your niche. Look at product offerings, pricing strategies, marketing messages, and social media presence. Tools like SEMrush and SimilarWeb can be incredibly powerful. 

Apart from the specific tools mentioned in each point, you can also consider Google Trends, Statista, IBISWorld, and different social listening tools like Hootsuite and Brandwatch to gather market data. 

Focus on Cash Flow Management

Another point we prioritised earlier is cash flow management. 

To ensure that you have enough money to cover expenses and ensure normal business operations, you can do the following:

• Regularly forecast - create regular cash flow forecasts that provide a clear picture of when money is expected to come in and go out of your business. Make sure that you update this forecast on a weekly, monthly, or quarterly basis to prevent shortfalls.
  
• Speed up incoming payments - late payments are one of the most common reasons for cash flow problems. Set clear payment terms with your customers, send invoices on time and incorporate automated reminders.
  
• Monitor your expenses closely - keep an eye on outgoing payments and categorise your costs as essential and non-essential. Explore different avenues for negotiating lower costs with suppliers or achieving other savings.
  
• Always have a cash reserve - one of the smartest ways to protect your business from cash flow shortages is to have a contingency fund. This will help cover any delayed payments, equipment failure, or external market downturns.

There are many tools on the market that can help you improve your cash flow management. For instance, businesses often rely on accounting tools like QuickBooks, Xero, and FreshBooks for real-time cash flow monitoring. 

Develop a Flexible Strategy

No matter what your business strategy is, make sure it’s flexible and can easily be adapted to new trends or changing market conditions. 

Markets are ever evolving and never still. Consumer habits, technology, and economic conditions can shift from day to day, leaving rigid business models behind. Make sure you’re consistently assessing what’s going on in your market, testing new ideas, and being open to change. 

A few tactics that can help you determine the needed change on time include:

• Listening actively to customers via feedback, surveys, and reviews; 
• Encouraging internal feedback from employees; 
• Participating in different groups on social media to gather opinions on niche topics. 

Putting in place all of the above will help you set the first steps towards a flexible strategy. 

Conclusion

Overall, just because a large portion of new business owners fail during the first year doesn’t mean that you have to. Take the insights from this article and put in the work to prevent entering the wrong market, creating a poor product, or failing financially because you couldn’t raise enough new capital for growth. 

Take the lessons from other companies and fill the gaps to survive, grow, and transform your business name into a go-to solution in your market. 

Frequently Asked Questions

Is cash flow really the biggest reason small businesses fail?

Cash flow is among the most common causes of failure. Even profitable businesses can collapse if they can’t cover short-term expenses like employee salaries or supplier bills. However, research shows that launching products or services that the market doesn’t need is the most popular reason for failure.

What role does marketing play in early business failure?

Many businesses fail not because their product is bad, but because no one knows about it. Inadequate marketing, unclear messaging, or failure to reach the right audience can quickly kill momentum.

Do operational challenges really have that big an impact?

Absolutely. Operational challenges, like inefficient systems, poor inventory management, or unclear team roles, can disrupt workflow and damage customer experience. Small businesses that use tools such as a service POS system often avoid these pitfalls by streamlining operations.