What Percentage of Small Businesses Fail? - financepal
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What Percentage of Small Businesses Fail?

January 13th, 2022

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It’s an unpleasant question, but one that any small business owner must consider: will my business fail? While the threat of failure is often not enough to extinguish one’s entrepreneurial fire, it must be regarded as a possible outcome — being aware of the possibility of failure can help you make informed decisions to avoid it.

When looking at small business failure rates, it is essential to realize that business owners control their destiny. For example, the foodservice industry has a 30% failure rate; this does not mean opening a restaurant is like betting on black at the roulette table. Instead, it indicates that a business owner must make better, more informed business decisions to avoid becoming another statistic. Typically, these business decisions are proactive and data-driven, focusing on controllable factors, such as tax compliance, budget allocation, and supply-chain management, while also attempting to mitigate variables outside of this realm of control, such as large-scale economic trends.

What is the Small Business Failure Rate?

The COVID-19 Pandemic has been devastating to small businesses, with 200,000 additional closures in 2020. In non-pandemic times, however, the failure rates remain consistent year to year; even in years of poor economic performance, the failure rate varies little. According to the U.S. Bureau of Labor Statistics, just over 20% of small businesses will fail within their first year of operation. By year two, just over 30% will have shuttered. After five years, only half will still be in business. And by the decade mark, two-thirds of small businesses will have ceased operations.

As the statistics show, a small business’s first year is its most treacherous — and as a business survives each year, its likelihood to survive the next increases. Interestingly, this pattern holds regardless of industry; barring extraordinary circumstances (like a global pandemic), there are no industry-specific survival bottlenecks.

While the survival pattern is consistent across industries, upon analyzing the Census Bureau’s Business Dynamics Statistics, it is clear that the actual survival rates can vary significantly between sectors.

Related Reading: Small Business Tax Preparation

Small Business Failure Rate by Industry

Let’s take a look at some industry failure rates:

Information Industry

Consisting of many different sub-industries, including information products, information services, information devices, and information distribution, the information industry features a constantly shifting business landscape that necessitates a highly proactive approach to managing business operations. While potentially lucrative, the information industry’s 5-year failure rate stands at a whopping 63%.

Construction:

Despite the constant demand for new builds, the high overhead, lack of cash flow security, and the ongoing battle for new contracts make the construction industry especially brutal for newcomers. While a plucky business owner can overcome the odds with the help of a sharp accounting team, the 5-year failure rate for fledgling construction businesses tops 64%.

Manufacturing:

A broad and highly varied industry, many variables come into play when operating a manufacturing business — some of which lie outside of your control. For manufacturing business owners, staying on top of global and local economic and supply-chain trends coupled with impeccable financial reporting is crucial for informing business decisions. Nevertheless, 51% of new manufacturing businesses shut their doors within five years of commencing operations.

Food Service:

Despite the ever-prevalent notion that food service is high-attrition and cutthroat, opening a food establishment is one of the less risky business ventures on this list. In addition, it is one of the most merit-friendly industries around — although possessing good business acumen is still essential for success. After five years, about 50% of new restaurants and bars can expect to remain in business.

Finance and Real Estate:

While most industries’ closure rates are somewhat unaffected by economic downturns, the same cannot be said for finance and real estate. Businesses in this sector provide ample opportunity for massive earnings and easy scalability, but at a cost — no business owner can control the markets. And when the markets dip, portfolios can go belly-up. The five-year outlook for new finance and real estate businesses is risky — just under 60% will fail.

Healthcare and Social Services:

While somewhat challenging to break into, the healthcare and social services industry couples decent stability with ample room for growth — the Bureau of Labor Statistics’s projected 21% growth rate leads all other industries. As far as failing — well, it’s a definite possibility. However, the healthcare and social services industry is incredibly immune to macroeconomic struggles. As is the case in any industry, survival is contingent on proactive, data-driven business decisions. Still, the five-year outlook is pretty good: only 40% of new healthcare and social services businesses are projected to fail before the half-decade mark.

Why Do Small Businesses Fail?

There are a plethora of reasons why a small business might fail. Some fall on the owner’s shoulders, while others can be attributed to strokes of bad luck. According to a study by CB insights analyzing failed companies, the primary causes of failure could be attributed to

  • Lack of demand in the marketplace — 42%
  • Cashflow issues — 29%
  • Personnel-related issues — 23%
  • Defeated by a competitor —19%
  • Price point issues — 18%
  • Product issues — 17%
  • Lack of a business model — 17%
  • Poor marketing — 14%
  • Legal challenges — 8%
  • Poor Business Credit — 8%
  • Lack of advisors — 8%

Put simply, there is no single factor that can make a company fail — it is often a nexus of many different factors, both within and outside a business owner’s realm of control. And while there is no silver bullet in business, many of the aforementioned downfalls can be mitigated — or entirely circumvented — by employing a dedicated team of accounting and bookkeeping professionals. Dedicated small business accountants, such as the experts at FinancePal, utilize data-driven analysis to inform proactive, effective business decisions. 

Meanwhile, specialized small business bookkeepers can ensure that your business has high-quality financial data to use as a roadmap. Together, specialized accountants and bookkeepers can help your business avoid cash flow, price point, and business model-related issues while enhancing your company’s ability to compete in the marketplace.

About the Author

Jacob Dayan, Esq.

Jacob Dayan is a true Chicagoan, born and raised in the Windy City. After starting his career as a financial analyst in New York City, Jacob returned to Chicago and co-founded FinancePal in 2015. He graduated Magna Cum Laude from Mitchell Hamline School of Law, and is a licensed attorney in Illinois.

Jacob has crafted articles covering a variety of tax and finance topics, including resolution strategy, financial planning, and more. He has been featured in an array of publications, including Accounting Web, Yahoo, and Business2Community.

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About the Author

Nick Charveron, EA

Nick Charveron is a licensed tax practitioner, Co-Founder & Partner of Community Tax, LLC. His Enrolled Agent designation is the highest tax credential offered by the U.S Department of Treasury, providing unrestricted practice rights before the IRS.

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About the Author

Jason Gabbard, Founder and CEO of JUSTLAW

Jason Gabbard is a lawyer and the founder of JUSTLAW.

About the Author

Andrew Jordan, Chief Operations Officer at FinancePal

Andrew is an experienced CPA and has extensive executive leadership experience.

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