Why Businesses Fail

There are many expert opinions and a few surveys that have attempted to define the most common reasons businesses fail, many of them focused on small businesses.

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

Common Reasons Businesses Fail

One weakness of an overall list for all businesses is the relevancy to the many types of industries and businesses. For example, location is critical to a retail business such as a restaurant or clothing store. Manufacturing a product requires many technical skills, quality control and ability to compete with large established manufacturers. An Internet based company has quite different challenges and drivers.

Therefore to be most useful business owners should analyze those causes of business failure that are most frequent in their industry or business sector.

1. Inadequate accounting and costing system and practices, which can lead to and be closely related to:
   1. Cash flow problem
   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

Reduce the Mistake Level

All businesses and business leaders make mistakes. Inexperienced and new businesses have more mistakes. Too many mistakes can lead to business failure. One goal to survive as a new company is to implement strategies to reduce the number of mistakes to a level the organization can survive.

1. Avoid repeating mistakes by recognizing and educating everyone in the company when a mistake is made. For example, a bad credit decision that goes sour. For example, a hiring mistake - what lessons were learned?

1. Watch your competitors for both their failures and successes and learn from them.

1. Implement a good accounting system early which will have many benefits - an accurate measure of cash flow; real measurement of costs, profits and losses; and needed data on growth rate and performance.

1. Approach mergers and acquisitions with eyes wide open - the failure rate of acquisitions and mergers is very high.

1. Focus on growing management and management skills at the same pace the business is growing.

References

1"What is the survival rate for new firms?", U.S. SBA. Seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Census data report that 69 percent of new employer establishments born to new firms in 2000 survived at least 2 years, and 51 percent survived 5 or more years. Survival rates were similar across states and major industries. Bureau of Labor Statistics data on establishment age show that 49 percent of establishments survive 5 years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more. Source: U.S. Dept. of Commerce, Census Bureau, Business Dynamics Statistics; U.S. Dept. of Labor, Bureau of Labor Statistics, BED

Related Best Practices

• Focus for Success
• Effective CEO
• Key Elements of Business Success

Other Resources

• SBA article on the major reasons small business fail
• "Top Reasons for Small Business Failure Study",Fast Company, by Cara Waters, reviews research on why small and medium size businesses fail, both reasons cited by business owners and independent accountants-which differ.
• "The Seven Pitfalls of Business Failure and How to Avoid Them", Business Know How, by Patricia Schaefer.
• "8 Reasons Why Small Businesses Fail", by Melinda Emerson (aka Small Biz Lady).
• "8 Reasons Why Small Businesses Fail", Intuit Small Business Blog, by Lee Polevoi.
• Living Company

Author

The author of this article is Terry Gardiner.

Terry Gardiner is the founder and President of Silver Lining Seafoods and NorQuest Seafoods - a medium-size Alaska seafood processing company; and currently a Board member of the Anvil Corporation, an employee-owned company specializing in oil and gas engineering.

His co-operative experiences include member director of the Commercial Fishermen Co-operative association; creation of legislation for the Alaska Commercial Fishing and Agriculture Bank; and advisor to the US Dept of Health and Social Services for the state Health CO-OPs.

Terry served ten years as a member of the Alaska House of Representatives -several legislative committee chairmanships, Speaker of the House, Chairman of the Alaska Criminal Code Commission and board member on various state and federal boards and commissions.

His non-profit experiences include National Policy Director for the Small Business Majority in Washington DC; working with the Herndon Alliance and ForTerra.

Terry authored the leadership book, "Six-Word Lessons to Build Effective Leaders: 100 Lessons to Equip Your People to Create Winning Organizations".

For more check: Terry Gardiner Long bio