Why Do Small Businesses Really Fail?

2009: 552,600 new businesses, 660,900 business closures. Seven out of 10 new employer firms survive at least two years, and about half survive five years. Findings do not differ greatly across industry sectors.

Go to the internet and you will see various articles about why small businesses fail. Many of them have lists, but many of the lists have various different reasons for failure. Most articles cite insufficient capital, but that does not address the underlying reason the business failed. Of course the business ran out of money, they had bad financial controls, or a weak marketing outreach or they did not understand the market, therefore they could not get the business off the ground and they ran out of money.

After reviewing several articles I did notice a few consistent themes in the research and articles. The first one is insufficient capital. Yes, every business owner should have enough cash to weather losses until the business breaks even and goes into the black, but if any other aspect of the business is not functioning properly it does not matter how much capital you have. The business must be viable and be able to cover operating costs. Cutting hair for $8 a person with 10 customers a month will not support rent/lease, utilities, supplies, etc. This is where a business plan is crucial.

The second is location. Some may take this as don’t set up shop in the bad part of town, but it could also be, don’t set up shop where there are several well know competitors or setting up shop where your clients are going to be. If you are going to open an upscale boutique, you will want to open it near where your potential market would live.

The third is lack of experience. This could be lack of experience in the industry or lack of experience as a business owner/manager. Perhaps you make a great Mexican plate taco, hoagie, or pizza, but do you know the restaurant business? Also, do you understand finances, leading teams, customer service or any of the other management skills necessary to run a business?

Fourth reason is growth. Now many would believe that having growth is a good thing, but I have seen larger businesses that did not manage their growth properly and ended up having to lay off staff or close. Some businesses may grow themselves without having the revenue to support that growth or a diverse book of business. One company that I worked for in the past had grown from a small mom & pop to a medium sized business. But they had one big contract. They thought there was no way to lose this contract, they were wrong. When they lost the contract they had to eliminate 1/3 of the positions. They had mismanaged their growth.

The fifth reason is competition. Sure, you could not overcome your competition. If you provide a similar product or service, how do you differentiate yourself? Do you know who your competition is and where they are? Lets say you want to open a taco restaurant. First of all here in San Antonio, TX we are known for our many Mexican restaurants. So how are you different from the well known, well established restaurants. And would you believe me if I told you that Jack in the box is a potential competitor? The reason is that they sell breakfast tacos. Without an understanding of your competition you will struggle.

The rest of the reasons listed are personal use of funds, low sales, poor credit agreements and too much debt. The reality is any of these reasons, or a combination of can cause a small business to fail. As you can see by the stats the odds are against most small businesses. This is where business knowledge, a business plan, knowledge of the market and other information and data is important. Knowledge is power and can very well mean the difference in getting your dream off of the ground and having to close it.

Source: U.S. Dept. of Commerce, Census Bureau; Administrative Office of the U.S. Courts; U.S. Dept. of Labor, Business Employment Dynamics (BED). Estimates based on Census data and BED trends.

Sources: U.S. Small Business Administration Office of Advocacy, September 2009
Survival and Longevity in the Business Employment Dynamics Database, Monthly Labor Review, May 2005. Redefining Business Success: Distinguishing Between Closure and Failure, Small Business Economics, August 2003.

Lopez, Greg. “Five Creative Ways to Start a New Small Business in a Turbulent Economy.”

SBA Colorado. Web. 20 Nov. 2008.


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