What the Experts Say: Why Small Businesses Fail

Recently, the SBA published a report entitled “Financial Difficulties of Small Businesses and Reasons for Failure”. It is instructive to review these causes, in examining your own business. (Keep in mind that there can be more than one reason for a business to fail–the statistics indicate what percentage of the small businesses attributed a certain factor as contributing to their failure).

  • 39% of small business failures are due to outside business conditions, such as new competition rent increases insurance or other costs
  • 28% of small business failures are due to financing, whether it is high debt service, loss of financing, or inability to get financing
  • 27% of small business failures are due to inside business conditions, such as mismanagement, decline in production, a bad location, or loss of major clients
  • 20% of small business failures are due to tax problems, with either state or federal authorities
  • 19% of small business failures are due to disputes with a particular creditor
  • 17% of small business failures are due to personal divorce, or health problems
  • 10% of small business failures are due to calamities, such as loss of goods or equipment in a natural storm.
  • 6% of small business failures are due to some “other” cause

A quick glance at these percentages shows that the significant majority of business problems are issues which the entrepreneur can control. Although he cannot control health problems or divorce, weather conditions or outside business conditions, he has some significant control over financing, inside business conditions, tax issues, and disputes with other creditors. Often times the entrepreneur is not “focused on the obvious” as he deals with other problems which come up daily. Nevertheless, we all must make sure financing is in order, and that the business is run in a businesslike way, so that the taxes are paid, for example, or those debts negotiated. Small businessmen must also stay in communication with creditors to avoid lawsuits, liens, attachments, garnishments, etc.

In order to prevent these obvious problems from occurring, small businessmen should pay particular attention to business formation issues, especially when business partners are involved. The structure and organization of the business should emphasize efficiency, profitability, and good tax treatment. In addition, a solid business plan never hurts. When a solid business plan falls apart and the projections are wrong, at least we can tell which assumptions need to be corrected.

In addition, communications with employees, vendors, suppliers, and customers is critical. Good contract drafting and solid negotiation skills help in formulating stable processes for all of these individuals upon whom we rely.

Of course when significant problems such as disputes with the IRS arise, they must be dealt with quickly and honestly. Resolving these disputes in a cost-effective manner is a central concern, as every business (particularly when cash flow is bad) attempts to conserve cash.

Do you have questions or concerns regarding any of these issues? Please do not hesitate to call me at (317) 266-8888 for further discussion of these matters.