Why Businesses Fail

There are many opinions and a few surveys that have attempted to define the most common reasons businesses fail.

Business Failure Rates

Business is risky and often deadly. The failure rate of businesses, especially in their first five years, is very high in all countries. According to statistics published by the U.S. Small Business Administration (SBA), seven out of ten new employer establishments survive at least two years and 51 percent survive at least five years.

1. Inadequate accounting and costing system and practices, which can lead to and be closely related to:
   1. Cash flow problems
   2. Poor inventory management
   3. Poor credit arrangement management
   4. Poor financial control
   5. Inability to manage costs
   6. Inadequate gross margins of products or services
2. Inadequate or weak management, which can have several roots:
   1. Lack of experience of founders, initial management
   2. Operational mediocrity or inefficiencies
   3. Dysfunctional management
   4. Lack of succession plan
   5. Poor business model (don’t know cost/profit drivers)
3. Lack of sales/revenues
   1. A declining market
   2. Competition
   3. Poor or insufficient marketing
4. Unexpected or rapid growth the organization is unable to keep up with
5. Insufficient Capital (Money)
6. Poor location – most critical for retail and consumer related businesses
7. Over-investment in fixed assets