Percentage business failures and their causes
If you believe the Bureau of Labor Statistics (BLS), about 20% of new businesses fail during their first year of trading. Less than 50% of businesses succeed past the first five years of operation, and by the tenth year in business, about 65% have failed.
But not all businesses fail at the same rate. In fact, some businesses succeed at a much higher rate than others. For example, health care companies have the highest survival rate. If you want to start a construction business, think again. Their failure rate is the lowest of all.
What percentage of businesses fail?
It’s a simple fact that most businesses fail. If you are thinking about starting a business, it is reasonable to feel nervous. Starting a business is a huge risk, especially if you are a first-time entrepreneur. People quote failed business statistics left and right, but the numbers are all over the place.
Do most small businesses fail?
About 20 percent of small businesses fail in the first year. By the fifth year in business, about 50 percent fail. Looking at the failure rate of companies, starting a business can be scary.
First of all, let’s consider a few questions about failing businesses:
Are new businesses more likely to fail than more established companies?
What time frame are we talking about? Are we referring to businesses failing within the first year or the first two years, or 5 or 10 years? The failure rate among companies is very different, depending on how long they have been in business. According to the Bureau of Labor Statistics, about 20 percent of small businesses fail in their first year, about 50 percent in their fifth year. About 80 percent of companies with employees survive their first year, and about 70 percent will survive in their second year in business. Data shows that about 50 percent of businesses with employees survive their fifth year in business.
What qualifies as a failed business?
Does failure mean the business no longer exists or that it exists in a different form? For example, how do we count a company that was merged with another business? Is that business a failed business? What if the business owner retires and closes the shop down. Does that count as a failed business?
What types of businesses have the highest failure rate?
Are we looking at failure rates based on the industry? Do we get an accurate number if we lump all businesses under one umbrella? Different industries have different failure rates. For example, 75 percent of construction companies survive their first year in business, 65 percent survive the second year, but only about 35 percent make it through their fifth year in business.
Nearly 20 percent of scientific, professional, and technical service businesses fail in their first year. Finance and insurance businesses have a high first-year failure rate, too, at about 16 percent.
Is it true that most restaurants fail?
Many people are asking: What is the percentage of restaurants that fail?” Although it’s true that only about 35 percent of foodservice businesses survive their tenth year in business, about 50 percent survive their fifth year, and about 70 percent survive their second year. Contrary to popular belief, restaurants don’t fail at an alarmingly high rate.
Why do restaurants fail in the United States?
Before you start a restaurant, you should ask yourself, “why do restaurants fail so often?” The restaurant business is one of the most demanding types of businesses you could start. Restaurants are challenging even in perfect economic conditions. Imagine starting a restaurant during a recession or a global health crisis.
According to one study published in Cornell Hotel and Restaurant Administration Quarterly, about 60% of restaurants fail during their first year in business, and 80% are forced to close within five years of their opening.
Starting a restaurant requires lots of capital, creativity, a great location and exceptional leadership. Succeeding in the restaurant business demands world-class staff, a delicious menu and a lot of blood, sweat and tears.
But why do restaurants fail? Restaurants fail for many reasons, including lack of cash, bad management, and unforeseen crisis like the Covid-19 global pandemic. Fortunately, almost everything that may cause a restaurant to fail is preventable if the right management is in place.
Are businesses really failing in such high numbers?
I have read an article in Fortune Magazine that stated that 9 out of 10 startups fail, but where do they get their numbers from? There is no source for this claim, so can you believe it?
The U.S. Census Bureau reports that 400,000 new businesses are started every year in the USA, but 470,000 are dying.
Does this mean that more businesses are dying than businesses are starting?
Wow. That is a scary number. It is also a bit strange to have more businesses fail than businesses started.
Does that mean that all businesses that ever started fail?
I hope not.
“More than one-third of businesses today will not survive the next 10 years”. John Chambers Cisco’s CEO of 20 years
There is a recent Harvard University study done by Shikhar Ghosh that claims that three out of every four venture-backed firms fail.
According to the U.S. Bureau of Labor Statistics, about 60% of all new businesses survive five years or more, and about one-third survive 10-years or more.
This is an interesting statistic because it shows you that a more mature business has a better chance of surviving.
According to the Small Business Administration – The SBA – close to 66% of small businesses will survive their first two years. What that means is that only about one-third of total companies will fail during the first two years. The SBA also tells you that about 50% of businesses fail during the first year in business.
This is a much better number than the 9 out of 10 failures that some claim.
Another crucial thing to consider about business failures is that a closed business doesn’t mean that the company has failed. For example, the business owner might retire one day and shut down the business. Or, an entrepreneur could get sick or die.
I don’t think we should treat closing business with a failing business.
Regardless of who you believe when you start a business, there is a good chance that you will fail. Your job as an entrepreneur is to maximize your chances of succeeding in business.
While you get inconsistent numbers on what percentage of businesses fail, you can do a lot to prevent your own business from failing.
What are the causes of business failure?
Businesses that fail to plan will fail.
Many failed businesses never took the time for a business plan. A business plan is an excellent tool because it helps you look at your business objectively. Proper business planning looks at business funding, pricing, competition, sales and marketing strategy, and other critical elements required to avoid business failure.
Business planning for success
Does a business plan really help you succeed in business? With every business, there will be challenges along the way. Having a business plan doesn’t guarantee success, but it may help you deal with foreseen and unforeseen challenges.
A business plan isn’t a must-have in business like revenue, customers, and profit. Your business may survive without one, but there is evidence that a solid business plan can help avoid failure.
Having a business plan helps you set priorities. With a plan, your business will be able to focus on the tasks required for success.
Businesses that can’t pay their bills fail.
You can’t stay in business long if you are unable to pay your bills. When you run out of cash, your business has failed. You can make profit predictions all day long, but the only thing that helps you pay your bills is cash on hand. If you ever do business with large companies, you will find that many of them are slow to pay. I mean, it’s not unusual for a large company to take 4-6 months to pay. They are masters at controlling their cash flow. Learn from them. If you’re too tight on money, you should consider taking a drastic measure, such as taking out the best payday loans available.
Why is cash flow management important to business success?
You cannot succeed in business without effective cash flow management. Yet, even though cash is the lifeblood of business, many business owners underestimate its significance.
In fact, cash flow is more important than having the best product in the market. It can hurt your business more than less than perfect customer service. Healthy cash flow is so vital to your business that it cannot succeed without it.
Think about it. Your business might have a less than stellar product launch. You might have had to explain delays and bugs in your software. But you can always improve mediocre internal processes to make the next release more successful. If you run out of cash, your business fails. You won’t have the funds to pay your staff, partners and creditors. When you run out of cash, there are no second chances. You are out of business.
Businesses with poor product offerings fail.
Your business will fail if you are offering something people are not willing to pay for. This is so easy, but so many companies miss entirely this critical aspect of a business. Especially, those who end up creating a product or build software without confirming with the market that there is a demand. If you develop your product without constant feedback from your prospective customers, your business will fail.
Businesses that can’t change fail.
Successful businesses have learned the importance of change. Businesses that fail refuse to change. They blame the economy, the competition, the customer, or their employees. The fact is that only a company that is willing and ready to change can succeed. If you want to succeed in business, look at change as an opportunity, not as a threat.
Businesses that can’t sell fail.
No amount of enthusiasm and goodwill can substitute for insufficient sales. A business that fails to attract paying customers in a cost-effective way is going to fail. You might have a product people are willing to pay for, but you can’t figure out a way to market it cost-effectively. If it costs you more money to get a new customer than you can afford, you don’t have a viable business.
Businesses with bad management fail.
Anyone can start a business, but if you don’t have the skills to manage your business, it will fail. No one is a born entrepreneur. Even if you don’t have the necessary management skills, you can learn. Entrepreneurs who succeed are fast learners. Learn, or your business will fail.
Here are the most important areas of business management:
- Sales and Marketing
- Human Resources
Businesses that can’t manage growth fail.
Many growing businesses fail. Many people think that only a company without revenue fails. That’s incorrect. Many growing businesses, some of them with record revenues, fail. Why? These businesses fail because they were unable to manage growth.
Here are the reasons businesses fail to manage growth:
- They grow too quickly. They cannot hire people fast enough to fulfill orders.
- They fail to train people fast enough.
- They run out of cash. Many times companies don’t have the necessary cash to maintain inventory.
- They are unable to obtain the required credit to grow their business.
Businesses with the wrong team fail.
Hiring is an art and a science. If you are unable to build a winning team, your business will fail. When you start out, there is a good chance that you have to do everything, but you will only build a business if you can build a team around you.
Businesses without systems fail.
The most successful businesses have systems for everything. Systems are required to effectively scale and manage a business. Employees need systems to perform at their potential. If you look at a successful business, it runs on systems. It doesn’t rely on an all-knowing business founder. There are systems within the enterprise that enable the company to scale and grow.
Of course, there are many more reasons a company can fail, but I wanted to list just a few.
In the comments section below, share what you think is the reason so many businesses fail.
Latest posts by George Meszaros (see all)
- How To Prove That Your Startup Idea Is Right – Metrics That Matter - January 5, 2023
- Building a Successful Data-Driven Business with Six Sigma - January 4, 2023
- 5 Steps to Select the Right Accounting Software - January 3, 2023