SME Failures: Common reasons during the first years
- Marc Esteve
- 5m
- 4 min read
Small and medium enterprises worldwide face significant early-stage challenges, with failure rates typically ranging from 20-30% in year one to 40-60% by year three, varying significantly by region and economic context.
Multiple Factor Interaction needs to be considered: Failed businesses rarely cite a single cause—typically 2-4 factors combine, with cash flow often being the final symptom of deeper strategic or operational problems
Five common failure reasons emerge across global studies:
· cash flow management problems,
· insufficient market demand or poor market fit,
· inadequate management skills and planning,
· insufficient capital or limited access to financing
· ineffective marketing or customer acquisition.
While cash flow issues consistently rank as the primary challenge globally, regional variations exist—developing economies emphasize financing access barriers, while developed markets focus more on digital transformation and competition.
A First-Year vulnerability of 20-30% failure rate in year one appears relatively consistent globally, though exact percentages vary by industry and economic conditions.
Cumulatively, by year five, roughly 50-70% of new SMEs have ceased operations across most markets.
Management problems reflect entrepreneurs lacking necessary business skills despite having good products. They become more apparent over time as the consequences of inadequate business planning compound, but they remain consistently the third reason for SMEs to go out of business.
In general, regardless of the industry or market, we can establish nine phases for creating a new company:
1. Motivation (Entrepreneurship): The desire to be an entrepreneur is the starting point and is a consequence of different personal, social, and cultural stimuli.
2. Identifying a business opportunity: It is necessary to identify a business idea with a future in the market, which may be the result of chance, contacts, or a systematic search.
(If you are reading this, you have surely already gone through the first two phases.)
3. Technical preparation: It is necessary to understand how the economy and businesses in general work, as well as the targeted sector's specifics. Likewise, a clear picture of the market niche you want to occupy and the characteristics of the target customers should be drawn beforehand.
4. Designing the business project: The previous knowledge must be applied to the specific business idea to design a solid and viable business concept in the target market. This design should be developed with varying degrees of rigor, starting with an informal definition, up to structuring content around instruments such as the business plan.
At the same time, it will be necessary to define the basic principles that govern the company, its long- and medium-term objectives, and the appropriate organizational structure to achieve them.
5. Obtaining the necessary resources: It is necessary to identify the material, human, and other resources, which will also lead us to understand the financing needs. All these resources should also be reflected in the business plan.
6. Launch: This involves choosing the opportune commercial moment, obtaining financing, legal, tax, and administrative procedures, hiring personnel, selecting partners (suppliers, distributors), and the corresponding negotiations. Much attention must also be paid to the start of internal operations: processes, communications, responsibilities, etc., preventing erroneous practices from forming at the beginning and becoming entrenched in the organization.
7. Introduction phase: adaptation and survival. The process of creating a viable company does not end with its preparation and opening. A critical management period begins whose priorities are to become known, adapt to the market response, and survive. A high degree of flexibility will be necessary, both in understanding unexpected factors and in adjusting processes and the organization. At this stage, it is critical to move quickly, while avoiding overreactions.
8. Consolidation: laying the foundations of the business. Once initial survival is guaranteed, it is necessary to ensure that the defined business concept works in the first commercial environment explored. It is essential to have a method in place for constantly re-evaluating objectives and progress.
9. Growth: productive and/or geographical expansion. Having proven the viability of the company in a limited market, the next step is to expand the business concept in terms of production (new product lines) or geography (new markets). Considering growth as a continuous business objective is a strategic guarantee against stagnation and weakness in the face of competitors.
Esteve&Partners offers support throughout the entire process, from personalized coaching in the initial phases to its 5T method for the efficient management of SMEs.
Common Failure Reasons: Global Patterns
Data Sources:
· OECD SME and Entrepreneurship Outlook (50+ countries)
· World Bank Enterprise Surveys (119 developing countries)
· World Economic Forum SME Studies
· Regional development banks (IDB, AfDB, ADB)
· National statistical agencies (where available)
· Academic research on SME survival rates