Have you ever researched the small business failure rate? It looks dismal, to put it lightly, but it might not be as bad as it seems. Some estimates say that 9 out of 10 small businesses fail within 10 years (Fortune Magazine), while others put the number at about 66% (U.S. Bureau of Labor and Statistics). A Harvard University study found that 3 out of 4 venture-backed firms will fail within 5 years – that’s 75%.
With so many conflicting claims, how do we know which estimate of the small business failure rate is correct?
The small business failure rate
We can’t truly know the percentage of small businesses that fail, according to SuccessHarbor. There are so many moving parts – the length of time in business, whether or not the company was legitimately reported, whether a business closed due to failure or something else, etc.
What we do know is that the Small Business Administration reports that around 66%, or two thirds, of small businesses survive their first 2 years in business. That means roughly one third are failing within the first two years, a number that agrees with the U.S. Bureau of Labor and Statistics’ small business failure rate estimates. Half fail within their first year in business. Ouch!
We didn’t tell you this to discourage you or make you feel anxious about the future of your company. In fact, we’re sharing these statistics to help you understand that failure in small business is an all-too-common thing. There are ways to combat failure in business, and that’s by acting on the lessons learned from others’ mistakes.
6 Factors That Drive the High Small Business Failure Rate
Below are 6 of the factors that go into small business failure along with ways you can combat them to be successful.
Running out of cash
Running a business is just not compatible with running out of cash. If you don’t have the funds you need to pay your bills, you will go out of business. It’s that simple. If you are struggling to pay your bills each month, you’re not succeeding.
You need to act now to make a change that will pull you out of the downward spiral. Reduce overhead if you can’t increase revenue right now. If you’ve been working from a rented or leased office, start working from home. Outsource employees to save money on salary and benefits.
Bad product or service idea
If you’re the only one who thinks your product or service is the bee’s knees, you will fail. Even if others like the idea but don’t buy it or feel that it’s a serious product, you’ll fail. Harsh, right? That’s the world of business. Start building a business based on how your audience will feel about your product, not based on your own feelings about it.
If you’ve already made the mistake of creating a product or service no one seems to want, you have to pivot. Change your tactics – find a new audience, a new way to use your product, or design a new product altogether. Failure is often the birth of a great new idea!
Inability to market the business
Some small businesses fail not because they’re not offering a great product, but because they are unable to figure out ways to market it to their audience. People that would be interested in buying can’t purchase something they’ve never heard of! If you’re paying too much to acquire a customer, you’re in the middle stages of failure already.
If you’ve been having trouble marketing your business, start with this list of ways to market your business for less than $25. It doesn’t always require big bucks to reach big audiences.
Lack of industry-specific skill set
You’re clearly skilled at what you do if you’ve started a business. There’s no doubt about that. However, many small business owners make the mistake of trying to be a jack of all trades – and as the old saying goes, being a master of none.
If you don’t know how to handle the marketing, accounting, administrative, or business development side of things…don’t! Hire someone to do it for you or outsource the duties to a trusted third party like Conversational.
Divided or nonexistent teams
Teamwork is such a crucial part of small business ownership. If you haven’t been able to create winning teams that work well together, you are going to fail. There are exceptions – if you’re a solopreneur who manages the business alone, this doesn’t necessarily apply to you. But if you’re just running your small business alone because you haven’t been able to find the right employees to hire, it’s time to get in gear. Working alone can become a habit if you’re not careful, and when you do bring team members in, you’ll need to lead and guide them to work together as you demonstrate teamwork with your own actions.
Part of owning a business that is different from being a salaried employee is the “big picture” mindset required. You must be able to see the forest for the trees. If you’ve been hyperfocusing on little details and individual parts of processes, you’re more likely to fail. Instead, you must take a step back and create overarching processes that guide all of your tasks and duties at work.
Being unable to create effective processes is a sure sign of small business failure. Don’t let it happen to you!
You can avoid contributing to the high small business failure rate by heeding these warnings and learning from the mistakes of founders who failed before you. Most importantly, by studying failure and the changes that stem from it, you may learn not to fear failure, but rather to fear the complacency of simply not trying.
Failure is the condiment that gives success its flavor. – Truman Capote