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.

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.

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

Sources

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