Why do businesses fail?

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Do you think it’s hard to run a business successfully? Have you ever heard something like: 8 out 10 businesses fail after the first year? (That’s not true, by the way.)

Naturally, this may cause aspiring entrepreneurs to feel angst, anxiety, and fear. 

But did you know that the statistics paint a different picture of business failure rates?

Without a doubt, it's challenging to run a business, but not impossible. Millions of entrepreneurs and business owners in the United States enjoy varying levels of success and make up a significant part of the economy. 

If you want to start a business or grow the one you currently have, this article will show you what the true failure rates are and why businesses fail. 

Statistics on business success rates

According to the Bureau of Labor Statistics (BLS), this is what fail rates look like:

  • One year after launching, about 78-80% of businesses are still operating
  • After two years, about 60-70% are still in business
  • After 5 years, about 50% of businesses remain open, and 
  • After 10 years, around 30% of businesses are still open

By the way, the BLS doesn’t look at how many businesses “fail.” Instead, it looks at survival rates. This term, along with its data, shows a less dramatic and more optimistic picture than the oft-stated, and misinformed, remark that “8 out of 10 businesses fail after one year.” 

In fact, according to the BLS data, the common “8 out of 10 business fail” benchmark doesn’t come true until well after 10 years since launching. 

 

Source: bls.gov

Statistics from the Small Business Administration also show that, for a given business, survival rates improve as business ages and that about 66% of businesses with employees make it to the two-year mark, and about 50% make it to the five-year mark. 

Of course, a lot of these figures come from a few years before the novel coronavirus reared its ugly head and undeniably changed everyday life, including how we run our businesses. 

It’s still too early to know the long-term effects the pandemic will have on small businesses. Although it’s taken a toll on the economy and caused many small businesses to shutter, COVID-19 isn’t the first adversity business owners have faced and it certainly won’t be the last.

The pandemic has devastated some businesses, but others have thrived during this same period. The U.S. Chamber of Commerce reports that among the small businesses prospering during COVID are those in the food and meal prep, wine, liquor, board game, home exercise equipment, and gardening industries.

Other businesses, like bars and restaurants, have suffered an enormous blow. However, creativity, such as transitioning to all takeout service, has allowed some restaurants to stay open.

As mentioned below, adapting and pivoting along with the market conditions of your particular business can mean the difference between a business surviving, struggling, or having to close down. Many businesses successfully managed to adapt to this new normal during the pandemic.

So, what does lead to businesses not surviving?

Top reasons why businesses fail

The business analyst firm, CB Insights, says these are the top reasons:

  • No market need
  • Insufficient funds
  • Wrong team/bad hires
  • Beat by competitors
  • Financing problems
  • Change in costs
  • Poor marketing
  • Failure to listen to customers
  • Mistimed product
  • Lack of passion
  • Legal problems
  • Failure to adopt 

Entrepreneur Magazine gives the following reasons as to why approximately only 30% of businesses make it past 10 years: Poor leadership, failure to connect with customers, inability to manage finances, and not delivering real value to customers.

No one plans on failing. Failed business owners never wake up in the morning and say to themselves, “How can I ensure failure today?” They probably thought they were making all of the right decisions along the way.

Maybe they didn’t have enough guidance, didn’t have mentors, or lacked the necessary business knowledge to succeed.

Business success is within your reach. There will be questions, doubts, challenges and adversities. However, you also have many tools at your disposal, including content designed to help you along the way.

Be sure to check out other useful content for your business at the Azlo blog or the Foundry Project to find new business opportunities.

Admin

Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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