Why Do Small Businesses Fail – Did you know that approximately 30 million entrepreneurs make up the US small business owner base and provide 7 out of 10 US jobs. This was announced by the SBA Law Office. In fact, more than 99% of businesses in the US can be classified as small businesses, defined as businesses with fewer than 500 employees.
According to the Small Business Association (SBA), an average of about 627,000 new businesses start each year. But unfortunately not all these companies work in the first year. So, what are the causes of small business failure?
Why Do Small Businesses Fail
According to the US Bureau of Labor Statistics, 21.7% of startups fail in their first year of operation. Less than 50% of companies survive 5 years and only a third of companies survive 10 years.
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The data below comes from the US Bureau of Labor Statistics. This shows how many new businesses have survived over the years. The number of companies that survive each year is fairly stable.
Health and social care are the most successful of all businesses. 85% of new health and social care businesses close after the first year of operation. This is higher than the overall average survival rate of 78.3% for all small businesses. And five years later, the success rate is still high at 60%.
The transportation industry is the hardest to break into. The survival rate in the first year of operation is only 60%. And that number drops to 30% in five years. Thus, 70% of transport startups fail after the fifth year.
To begin with, let’s be clear: cash flow is not the same as profit. You can have a very profitable business, but if you don’t have strong cash flow, you can fail. Cash flow is money received less expenses. This is what you need to pay your financial obligations.
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Problems arise when you expect to be paid for a product or service, but you have bills to pay.
A common miscalculation for a new business owner is to assume that there is a need for your product or service. Or they don’t help the market understand how their product/service offering will make their lives better. This is why market research is important for both new and existing businesses.
Running out of cash, as opposed to having no cash flow, when accounts payable exceed accounts receivable. Basically, you spend more than you earn.
A bad employee(s) can negatively impact your business by being a cancer in the workplace, tarnishing your brand, or making mistakes that can affect your bottom line.
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Competition is good for consumers, but it can also be good for business if you know how to use it to your advantage. However, if you can’t find a way to differentiate yourself from the competition, you could put yourself out of business.
Now let’s look at what makes a small business successful. Many business owners who have crossed the 5 or even 10 year threshold cite one or more of the following reasons for their success:
It sounds obvious, but you’d be surprised how many business owners don’t put their customers first when making business decisions.
You have a great product or service, but without a strong marketing strategy, your potential customers will find out about what you have to offer. Eventually, you will need to start investing in your marketing efforts, but there are some inexpensive marketing strategies you can implement in the beginning.
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Just as a bad employee can negatively impact your business, hiring a great employee can take your business to a new level of success. So take the time to learn how to find and hire the right employees.
We understand that small businesses are the driving force behind the growth of our economy and that many factors influence the success and failure of small businesses. In good times and bad, business owners need a quick cash flow solution to pay payroll, buy new equipment, expand inventory, pay taxes, and more.
The average payback period is 12-18 months. Most small businesses want to grow and need guidance and help from a lender, such as small business financing, to achieve this goal. We are affiliated with the nation’s leading alternative lenders and can give you access to fast capital regardless of your business, credit score or business type. We specialize in high risk commercial loans. There are no easy answers to questions about small business success and failure. Different vantage points all over the map.
Ask the average person what the purpose of a business is, or how they would define a successful business, and the most likely answer is “making a profit.” A more sophisticated answer might expand it to “one that produces acceptable returns now and in the future.” Ask any public company financial officer and the answer is, “That which maximizes shareholder wealth.” Management guru Peter Drucker said that business success requires creating customers, while quality guru UE Deming advocated that business success requires delighting customers. No one can argue with any of these definitions of small business success. Small business owners need independence. , but they overlook an important element that determines the success of a small business owner:
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Many people have wondered if there is a significant difference between being a small business owner and an entrepreneur. Some entrepreneurs place more emphasis on growth in their definition of success. William Dunkelberg and A.S. Cooper. “A Typology of Entrepreneurship: An Empirical Study,” Frontiers of Entrepreneurial Research, ed. C.H. Vesper (Wellesley, MA: Babson College, Center for Entrepreneurship Studies, 1982), 1–15. However, it is clear that entrepreneurs and small business owners define their personal success and the success of their business largely in the context of providing them with independence. For many small business owners, taking responsibility for their own lives is a key motivator: “a sense of independence is fiercely held,” and money is seen as a useful byproduct. “Report of the Commission or Inquiry into Small Business” The Bolton Report, Vol. 339 (London: HMSO, February 1973), 156–73.
Graham Beaver, Business, Entrepreneurship and Enterprise Development (Englewood Cliffs, NJ: Prentice Hall, 2002), 33. Financial performance is often considered an important measure of success. However, small businesses are reluctant to disclose their financial information, so this is always an imperfect and incomplete measure of success. Terry L. Besser, “Community Involvement and Perceptions of Success Among Small-Town Small Business Entrepreneurs,” Journal of Small Business Management 37, no. 4 (1999): 16.
. There is a wide range of values, from 90 percent to 1 percent, with a wide range of values in between. Roger Dickinson, “The Business Failure Rate,” American Journal of Small Business 6, no. 2 (1981): 17–25. Obviously there is a problem with these results or some factor is missing. One factor that may explain this discrepancy is the different definitions of the term
Can have multiple values.A. B. Cochran, “Small Business Failure Rates: A Review of the Literature,” Journal of Small Business Management 19, no. 4, (1981): 50–59. Small Business Collapse. A broad term that includes several types of bankruptcy: (1) liquidation, (2) opportunity cost waivers, (3) avoidance of creditor loss, (4) creditor loss, and (5) bankruptcy. This is often measured in terms of business going out of business, but can be caused by a number of things:
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Failure can therefore be viewed as a cascading series of outcomes (see Figure 1.1 Types of Business Failures). There are even cases where small business owners involved in foreclosures consider the business a success in foreclosure. Don Bradley and Chris Cowdery, “Small Business: The Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer. uca.edu/research/asbe/2004_fall/16.pdf. In addition, it is difficult to consider the small business sector when examining failure and bankruptcy. Bounce rates can vary widely across industries; In the IV quarter of 2009, the failure rate of service companies was half that of transport companies. “Equifax Study Shows Ups and Downs in Commercial Lending Trends,” Equifax, 2010, accessed October 7, 2011, www.equifax.com/PR/pdfs/CommercialFactSheetFN3810.pdf.
Another problem with small business failure is the time horizon. Again, there are wildly different perspectives. The Dan River Small Business Development Center reported data showing that 95 percent of small businesses fail within five years. Don Bradley and Chris Cowdery, “Small Business: The Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www. sbaer.uca.edu/research/asbe/2004_fall/16.pdf. Dunn and Bradstreet report that businesses with fewer than twenty employees have only a 37 percent chance of surviving four years, but only a 10 percent chance of going bankrupt. Don Bradley and Chris Cowdery, “Small Business: The Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf. The US Bureau of Labor Statistics found that 66 percent of new businesses survive two years and
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