Why Small Businesses Fail Pdf – There are no easy answers to the questions of small business success and failure. There are different views on the map.
Ask the average person what their business goal is, or how they define a successful business, and the most likely answer will be “making a profit.” A more sophisticated answer might extend it to “produces acceptable benefits now and in the future.” Ask anyone in the finance department of a public company and the answer will be “maximizing shareholder wealth.” Management guru Peter Drucker said that in order for a business to succeed, customers must be created, while quality guru WE Deming said that business success requires “delighting” customers. No one, in particular, can argue with any of these definitions of small business success. The need for independence of small business owners. , but they miss an important element of the definition of success for a small business owner:
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Many people have researched whether there is a significant difference between a small business owner and an entrepreneur. Some entrepreneurs focus more on growth when defining success.William Dunkelberg and A.S. Cooper. “Entrepreneurial Typologies: An Empirical Investigation,” Frontiers of Entrepreneurship Research, ed. K. H. Vesper (Wellesley, MA: Babson College, Center for Entrepreneurial Studies, 1982), 1–15. However, it is clear that entrepreneurs and small business owners define much of their personal and company success in the context of giving them independence. For many small business owners, being in charge of their own lives is a key motivator: “a fiercely guarded sense of independence,” and money is seen as a useful byproduct. “Report of the Commission or Inquiry into Small Firms,” The Bolton Report, Vol. 339 (London: HMSO, February 1973), 156–73.
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Graham Beaver, Business, Entrepreneurship, and Enterprise Development (Englewood Cliffs, NJ: Prentice Hall, 2002), 33. Financial performance is often viewed as an important measure of success. However, small businesses are reluctant to report their financial information, so it will always be an imperfect and incomplete measure of success.Terry L. Besser, “Community Participation and Perceived Success of Small Business Operators in Small Cities,” Journal of Small Business Management 37, no. 4 (1999): 16.
. There are different values from 90 percent to 1 percent, with a wide range of values in between. Roger Dickinson, “Business Failure Rates,” American Journal of Small Business 6, no. 2 (1981): 17–25. Obviously, there is a problem with these results or some factor is missing. One factor that explains this discrepancy is the different definitions of the term
Can have several meanings.A. B. Cochran, “Indicators of Small Business Failure: A Review of the Literature,” Journal of Small Business Management 19, no. 4, (1981): 50–59. Small business failure is a broad term that encompasses several types of failure: (1) shutdown, (2) opportunity cost failure, (3) creditor loss avoidance, (4) creditor loss, and (5) bankruptcy. is often measured by a firm’s shutdown, but it can be caused by a number of factors:
Therefore, failure can be considered in terms of a cascading series of results (see Figure 1.1 “Types of business failures”). There are even times when the small business owners involved in the closing consider the firm a success at the time of closing. Don Bradley and Chris Cowdery, “Small Business: The Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www.sbaer. uca.edu/research/asbe/2004_fall/16.pdf. Then there is the difficulty of considering the small business sector when examining failure and bankruptcy. Failure rates can vary greatly in different industries; In the fourth quarter of 2009, the failure rate of service firms was half that of transportation firms. “Equifax Study Shows the Ups and Downs of Commercial Credit Trends,” Equifax, 2010, accessed October 7, 2011, www.equifax.com/ PR/pdfs/CommercialFactSheetFN3810.pdf.
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A second issue with small business failure is considering the time horizon. Again, there are different views. The Dan River Small Business Development Center presented data showing that 95 percent of small businesses fail within five years. Don Bradley and Chris Cowdery, “Small Business: The Causes of Bankruptcy,” July 26, 2004, accessed October 7, 2011, www. sbaer.uca.edu/research/asbe/2004_fall/16.pdf. Dunn and Bradstreet reported that companies with fewer than twenty employees had only a 37 percent chance of surviving four years, but only 10 percent went bankrupt. Don Bradley and Chris Cowdery, “Small Business: Causes of Bankruptcy,” July 26, 2004. Accessed October 7, 2011, from www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf. The US Bureau of Labor Statistics found that 66 percent of new establishments survive for two years, and that number drops to 44 percent after two years. Anita Campbell, “Business failure rates highest in first two years,” Small Business Trends, July 7, 2005, accessed October 7, 2011, smallbiztrends.com/2005/07/business-failure-rates-highest-in.html. The longer you live, the more likely you are to survive. It makes sense, but it’s not a guarantee. Any business can fail after years of success.
There is no more mysterious or well-studied issue in the small business world than what causes them to fail. Given the important role of small businesses in the US economy, the economic consequences of failure could be significant. However, there is no clear answer to the question.
Three broad categories of causes of failure have been identified: managerial inadequacy, financial inadequacy, and external factors. The first reason is managerial inadequacy. The failure of a firm is based on the limitations of its owner, such as lack of business skills or lack of behavioral skills. , the most frequently cited cause of firm failure.T. C. Carbone, “The Challenges of Small Business Management,” Management World 9, no. 10 (1980): 36. Unfortunately, this is an all-encompassing explanation, like explaining that all plane crashes are due to pilot failure. More than three decades ago, “while everyone agreed that mismanagement was the primary cause of failure, no one agreed on what ‘bad management’ meant or how to recognize it, except for company collapse, so how did everyone John Argenti, Corporate Failure: Causes and Symptoms (New -York: McGraw-Hill, 1976), 45. This observation is still true today.
The second most common explanation refers to financial insufficiency. A firm’s failure is based on financial problems, such as insufficient initial financing, inadequate financial controls, poor cash flow management, and the inability to raise additional capital. , or lack of financial strength in the firm. A third set of explanations related to environmental or external factors is that firm failure is based on external factors such as economic downturns, rising interest rates, or changes in consumer demand. , for example, a significant economic downturn.
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Each factor is discussed in detail because it is important for small firms to succeed rather than fail. However, these factors are not mutually exclusive elements. A downturn in the economy reduces a firm’s sales, which negatively affects the firm’s cash flow. An owner who lacks the knowledge and experience to manage cash flow problems will see his firm fail.
Inadequate management is generally accepted as the main cause of small business failure. Unfortunately, this term covers a very broad set of issues. It has been estimated that two-thirds of small business failures are due to owner-manager incompetence. Graham Beaver, “Small Business: Success and Failure,” Strategic Change 12, no. 3 (2003): 115–22. Problems identified include behavioral problems, lack of business skills, lack of specialized technical skills, and marketing myopia. This prohibits displaying every limitation of owners. However, some limitations are stated with remarkable consistency. Having poor communication skills with employees and/or customers seems to be a sign of failure. Sharon Nelton, “Ten Major Threats to Success,” Nation’s Business 80, no. 6 (1992): 18–24. Failure to listen to criticism or differing viewpoints is a sign of failure, as is an inability to be flexible in one’s thinking. Robert N. Stack, “Why New Businesses Fail,” Dunn and Bradstreet Reports 33, no. 6 (1985): 34–38.
Ask most small business owners where their strategic plans are, and they’ll likely point to their foreheads. Failure to conduct formal planning is perhaps the most frequently cited problem with small business failure. Given the relative lack of resources, it is not surprising that small firms choose intuitive planning approaches.G. E. Tibbits, “Small Business Management: A Normative Approach,” Small Business Perspectives, ed. Peter Gorb, Phillip Dowell, and Peter Wilson (London: Armstrong Press, 1981), 105.
Jim Brown, Business Growth Action Kit (London: Kogan Page, 1995), 26. Formal approaches to planning are seen as a waste of time, Christopher Orpen, “Strategic Planning, Scanning Activities and the Financial Performance of Small Firms,” Journal of Strategic Change 3, no. . 1 (1994): 45–55. or they are considered too theoretical.Sandra Hogarth-Scott, Katherine Watson, and Nicholas Wilson, “Should Small Businesses Be Marketing to Survive and Grow?” Marketing Intelligence and Planning 14, no. 1 (1995): 6–18. The end result is many small businesses
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