What Percentage of Businesses Fail- and Why?

We take a look at the staggering statistics behind how many small businesses fail, as well as possible reasons why.

This is the first in a series of posts we’ve got for you looking over the rate in which organisations fail, and the reasons for it. We’ll be covering around twenty separate factors over the coming weeks, but for our first, introductory post, let’s have a look at the scale of the problem, as well as some reasons why.

Starting a business remains a top priority for many people, and is seemingly easier than ever due to the technological landscape now offered in the 21st century. According to results from a St George-commissioned study, there’s five-million people in Australia alone that are attracted to the idea of starting their own business. Therein lies the problem: of that five million figure, all but a few would-be entrepreneurs are aware of the realities of starting their own business.

In an Australian context, the number stands at around 60% of small businesses closing their doors in 36-months. In the U.S., according to figures published last year from the Small Business Administration, the market is kind to businesses in their first 12-months, but the real challenge is surpassing the five-year mark. “Four out of five establishments that started in 2016 survived until 2017 (79.8%). From 2005 to 2017, an average of 78.6% of new establishments survived one year,” the SBA wrote.

The devil in the detail, however, is the fact that “About half of all establishments survive five years or longer,” they wrote. “In the past decade, this range from a low of 45.4% for establishments started in 2006, and a high of 51% for those started in 2011.”

“About one-third of establishments survive 10-years or longer.”

The Small Business Authority, citing data from the Bureau of Labor Statistics says that while the data isn’t fully collated “on firm survival rates, other data sources suggest that about two out of three establishments exits are the result of firm closures.”

Moyak reports that “8 out of 10 small business start-ups are no longer in existence after five years due to lack of management knowledge and skills.” The site cites SBA data, although these numbers are hard to corroborate. What’s easier to confirm is their research into work from Michael Ames’ ‘Small Business Management’ who offers up his top ten reasons as to why they fail.

Why do they fail?

Whether it be paying staff wages, bureaucratic red-tape, taxes, problems raising capital or a fiercely competitive market, the odds, in large part, are stacked against the would-be entrepreneur. According to Michael Ames, the top eight are: lack of experience, insufficient capital, poor location, poor inventory management, other-investment in fixed assets, poor credit arrangements, personal use of business funds and unexpected growth.

We’ve compiled a few of our own reasons below, where there’s a seemingly endless list of potential reasons why, including and not limited to:

-Choosing a segment of the market that isn’t profitable or filled with a hungry crowd.

-Not having an understanding of that market demographic or their needs.

-Pricing (too high and you’ll lose potential transactions, too low and you’ll lose money from operating)

-Over-dependence on a small crowd of customers, not marketing to new ones.

-Capital

-Not anticipating changes and disruptions in the marketplace.

Management- this is a long-winded conversation which we’ll cover in a separate post.

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