Debunking small business failure stats

Small businesses face a ton of damning generalizations.

Maybe you’ve heard that 50% of small businesses fail within their first five years. Or even that 80-90% fail within this time. Or that two-thirds of businesses survive their first two years, and one-third survive their first 10 years.

These claims are disheartening for entrepreneurs. But before taking these stats to heart, consider their validity. There are many sources, reputable and not, that can be found online. With these businesses stretching across all industries, and with unique reasons for closing (not always failure), what is the point of stacking them all together?

What is failure?

What does failure mean to the organizations reporting these stats? Each source seems to have a unique definition, be it “closure,” lacking profit, lacking ROI for investors, or a decline in employees.

First, we should consider that 99.9% of US employers are small business owners. Let that sink in. In 2018, 30.2 million businesses were operating in the US, 22 million of which functioned independently. Based on these stats, sole-proprietor businesses take up roughly 73% of US business.

The Bureau of Labor Statistics’ Business Employment Dynamics (BED), which tracks business openings and closures, reports that “56% of businesses survive after 5 years.” But their stats exclude that huge percentage of small businesses that run without employees.

Business Employment Dynamics also defines closings as “units with positive employment in [one month] in the previous year, with no employment or zero employment reported in [the same month] of the current year.

Business failure is very often confused with closure. But according to the US Small Business Administration, many businesses with employees (those that BED report on) close because of personal reasons.

With so many reasons for closure, across every industry, what’s the point of lugging everyone together and claiming that almost all businesses can expect to fail within 10 years?

There is a point, but without establishing a set definition for small business failure, it’s missed.

What’s really eating small businesses?

The top reasons for closure, as reported by the SBA, include “low sales, the owner(s) retiring, and the owner(s) selling the business. With the next top reasons being opening another firm and illness/injury, it shows that many owners close shop for personal or health reasons, not just business reasons.”

Although low sales are a major factor, a huge chunk of business closures deal with age. Owners are retiring, selling, or moving on from their businesses.

But the top reason for failure is as expected: low sales and poor cash flow. Sales blockage may be because of lack of demand, competitors, pricing, non-user friendly product, poor marketing, or any number of issues.

Some specific issues to keep in mind:

  • 74% of high-growth startups fail due to premature scaling.
  • Almost half of cyber-attacks are targeted at small businesses
  • A majority of hacked businesses shut down in six months

To clarify, it’s better to be industry-specific. The BED does well to report on each industry. For example, Mining, Quarrying, and Oil and Gas Extraction businesses founded in 2008 had a 28.5% survival rate over 10 years. For each year in business, a company in the industry’s survival rate tends to drop roughly 4%. According to Chamber of Commerce, the top industries for business failure are construction, warehousing, and transportation. Although these stats don’t tell us why these businesses closed, they do give us a better idea of which industry is declining most rapidly.

How to not become a statistic

Aside from these stats, it’s always a good idea to get accounting help. Hire professional accounting solutions, like a bookkeeper, an accountant, or outsource to a marketing agency. Only one-third of small businesses employ an accountant.

If your business has confidence in its finances, invest in some finance tracking software. Failure is very commonly linked to poor financial management and the unwillingness to use resources that can make up for unfamiliarity of business responsibilities.

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Have a backup plan. Since personal reasons account for so many closures, it’s important to prepare for the worst. Of course, that’s not as easy or affordable as it sounds, but training an assistant manager or a benefactor that can assume the role of management in the unfortunate case of your sudden absence (knock-on-wood) will pay off. The ship shouldn’t go down with the captain.

Lastly, researching your competition should be a no-brainer. There’s nothing like starting a small business that has no demand. Go in swinging. Let consumers know why your business is necessary over your competitors. Keep that angle fresh. Remember, new competition spawns every day and is able to do the same.

While it’s important to understand the trends and rates of small business failure, it’s more helpful to look at business failure in terms of specific industries and issues. Don’t let your entrepreneurial drive be downshifted because of generalizations.

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