Why Businesses Fail and How to Stop it

In another life, I run the day-to-day operations of an accounting business. We’re the rare case where we’ve been in business successfully for more than 18 years. Why is this so unusual? Because, according to the small business administration, only 33.5% of all businesses survive past 10 years.

• By year one, 20% of business startups close

• By year 5 that number is 52%, over half.

• And by year 10, 66% of business that started 10 year ago are no longer.

On a macro scale, I was looking at the DOW 30 stocks from 40 years ago. Only 20% of the companies that were on the DOW Industrials in 1976 were still on the DOW in 2018. 80% of the companies weren't able to maintain their position on the list. Here are some that were top leaders in their fields, but no longer in business, and some of the companies that have replaced them.

According to studies by the Small Business Administration (SBA), 1 in 9 business close each year. In fact, the rate of new startups is about 8.1% a year while the rate of business closures is about 7.1%. Contrasting this with pre real estate crash levels, before the crash in 2008 the new business start ups were about 10.5% of all businesses and the closures were about 9% on average. The SBA states that low sales or cash flow problems make up a quarter of business closures in 2018.

Michael T Dean, researching an article for Investopedia called Top Six Reasons New Businesses Fail, updated June 25, 2019, found the following were the top 6 reasons for business failure.

Not Investigating the Market before you jump in.

How many times to you know of people who jump in headfirst with no research into what they're doing?

Some of the questions that need to be researched are; Is the market saturated? If a retailer or other store front, is there enough foot traffic? What about parking? Is the industry a new market, or one at the end of the business life cycle? What about the economy, is it going up or down?

I remember everyone trying to become mortgage brokers or real estate investors in 2004-2007. There were signs of the impending downturn, but people didn’t want to look. In a mini-crash in the early 90’s I knew a contractor who was sitting on five spec homes when the market turned. He lost his business.

Not having a realistic business plan.

Here are a few quotes about planning I like.

• “A goal without a plan is just a wish” – Antoine de Saint-Exupery

• “In preparing for battle, I have always found that plans are useless, but planning is indispensable.” – Dwight D. Eisenhower

• “By failing to prepare, you are preparing to fail.” Benjamin Franklin

• “Plan your work and work your plan.” – Napoleon Hill

• “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” – Unknown

Be realistic. When planning, the rule of thumb is that everything will cost three times more than you think, and everything will take three times as long. The SBA requires a business plan to get financing.

Where will your business be in 1 year, 5 years, or ten years? Have you planned for it? A business plan should consist of your research on the market or industry, projected costs, and sales and marketing plans.

What happens if your business plan is wrong? Don’t fret. You can adjust and modify your plans. However, the more mistakes you make at the beginning of the business cycle, the more costly it will be.

Not enough Capital to start with.

How much money do you have to start your business? How much money are you willing to put in when times get hard? I knew a man who started a very successful business, but at one time had to sell his car to finance the monthly payroll for his employees when cash was low. What are you willing to do? I read somewhere that business starting with less than $50,000 are twice a likely to fail as business started with more than $50,000 in capital. A good business plan at the beginning can identify some of the cash pitfalls that will happen.

Bad Location, Bad Marketing or Internet Presence.

If you enter your business type or industry into google, is your business name on the first page? People rarely go beyond the first page of a search. Is your SEO tweaked to maximize your search findings? What is your marketing plan, daily, weekly, monthly, or yearly?

Bad location of a brick and mortar can be no parking, bad neighborhood, not enough traffic, bad signage, or a myriad of other things. Do your research beforehand.

Not Flexible Enough.

This is one that relates to the companies on the DOW chart above. Eastman Kodak is a great example. It was founded in 1888, and was a large successful camera related company for over 100 years. Then came digital pictures. No one wanted film anymore. Eastman Kodak didn’t change and is now a shell of their former self. In 2012 they filed for Chapter 11 bankruptcy.

The only thing in life that is constant is change. Is your business changing with the times? Think of Blockbuster Video. There was a store on every corner. Blockbuster was put out of business by streaming technology.

Expanding too Fast.

Why would growth be a bad thing? Here's a scenario. You just got a new marketing client and they’ve given you all their business. You need to immediately staff up. Before you get your first payment from the client, you need to pay your people. Now there's an issue with one of the projects, and there's delays. It looks like you won’t get that first client payment for another 45 days. Are you going to have enough cash on hand? Is your financing in place before you grow?

Making money is not easy. If it was, everyone would be doing it. Preparation and flexibility are the keys to sustaining a business in the long term.