In most countries (including the US and UK), more than half of newly created enterprises fail within the first five years (business failure statistics according to OECD Entrepreneurship at a Glance Report 2016 and Eurostat).
But what is the primary reason for it? Why does a business fail?
It’s extraordinary how small businesses around the world fail for the same set of reasons.
Knowing the top reasons why businesses fail in advance, or at least sufficiently early, can change how you think and act in your start-up.
In fact it may save your new business from failure.
How Long Do Businesses Last?
The quick answer for what percentage of small businesses fail, according to data from the Bureau of Labor Statistics: about 20% fail in their first year, and about 50% of small businesses fail by their fifth year. But it’s also helpful to see this statistic in terms of how many American small businesses survive. According to the Bureau of Labor Statistics’ Business Employment Dynamics, here’s what the survival rate looks like:
- About 80% of businesses with employees will survive their first year in business. (The most recent data shows that, of the small businesses that opened in March 2016, 79.8% made it to March 2017.)
- About 70% of businesses with employees will survive their second year in business. (The recent data shows that of the small businesses that opened in March of 2015, 69.2% made it to March of 2017.)
- About 50% of businesses with employees will survive their fifth year in business. (Data shows that of the small businesses that opened in March of 2012, 50.2% made it to March of 2017.)
- About 30% of businesses will survive their 10th year in business. (The most recent data shows that of the small businesses that opened in March of 2007, 33% made it to March of 2017.)
Why Do Businesses Fail Infographic
For any new entrepreneur, it’s natural to be optimistic. However, whilst being passionate about your product or service is valuable, it often can cloud judgement.
Of course, as an entrepreneur, your world-changing idea is vitally important. Otherwise, what is the point of starting a new company in the first place? But when the idea hits the market you need to adapt and adjust to reality. This is when that plan gets changed if there was one!
The Harsh Reality
Today’s infographic from InsuranceQuotes shows that this entrepreneurial enthusiasm might be misplaced.
The reality is that it’s a cruel world out there for entrepreneurs. The Bureau of Labor Statistics in the United States keeps a sobering tally of how often businesses fail, and here are the numbers from 1995-2015:
The following infographic pinpoints the top six reasons why American businesses fail:
- 14% don’t know, research or pay attention to their customers
- 19% are overtaken by their competitors
- 23% haven’t built the right team
- 29% run out of money
- 42% invest in a market that doesn’t need their products/services
- 82% have problems with their cash flow
Some of the top reasons why business fail
- Low Sales
- Lack of Experience
- Insufficient Capital
- Poor Location
- Poor Inventory Management
- Over-Investment in Fixed Assets
- Poor Credit Arrangement Management
- Personal Use of Business Funds
- Unexpected Growth