Business Planning and Financial Success

Common Reasons for Business Failure

Every business starts out with high hopes for success, and entrepreneurs spend vast amounts of time, energy and creativity to make that success reality. Unfortunately for most start-up businesses, that hoped-for success never materializes. About 60 percent of all businesses fail within the first two years and for certain industries, such as the restaurant industry, the failure rate is even higher. Although chances for business failure diminish as time passes, most businesses are never safe. Competition and changing market conditions ensure that the struggle for success never ends.

The reasons for business failure vary, but firms such as Dun and Bradstreet suggest several most common reasons for business failure.

Of these common reasons for business failure, lack of adequate financing is the easiest to observe. Indeed, lack of financing can lead to problems in other areas. For example, a retailer might choose a less-than-ideal location for its more affordable lease. But in an industry where location is key, this might not be such a bargain for the retailer.

Despite the discouraging statistics on business failures, there is no shortage of entrepreneurs willing to test their skills in the marketplace. The Internal Revenue Service reports that the number of small businesses is increasing and in 1993 reached the largest total ever an estimated 21.5 million business tax returns. Overall, the number of small businesses is growing at a rate of about 2 percent annually, approximately equal to the general population growth.

Of these businesses, only 14,000 employ over 500 employees and are considered large. That leaves over 21 million small businesses. Beginning in 1994, there were 5.8 million businesses with employees, and about 15.5 million without employees. Those businesses without employees range from home-based consultants to free-lance writers and small farms. The National Home-Based Business Association reports that there are approximately 45 million home-based workers, with about 35 million working formally and informally as small businesses.

Although every small business must be concerned about financing, this site is intended primarily for small businesses that have employees or that maintain a place of business apart from their homes.