Why Is It That Some Small Businesses Fail?

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WHY IS IT THAT SOME SMALL BUSINESSES FAIL?

        One topic of perennial interest to small business managers is why some small businesses go under. The knowledge of why many small businesses have failed can be helpful in seeing that it will not happen to your investment.

        It is hard to measure the size of a business. According to The Department of Trade and Industry (DTI), an SME can be described as a business that employs between 0-49 people. However a company such as a Chemical Plant may employ less than 49 people but have a turnover of £20 million. So according to the number of employees, the DTI would class it as a small business. However, according to the level of turnover it could be classed as a large business. The size of the firm is generally measured by the amount employed1.

        The amount of SME’s is forever increasing. There are many reasons for the increase, such as; improved technology, ability to sub-contract part of business and public sector being encouraged to become smaller. There is also Push and Pull factors that help people come to the decision to be self-employed. “Push factors” include people who are unemployed or made redundant decide to venture on their own. This may be simply starting their own window cleaning service. Another “push factor” is the “Pratt factor” this is when an employee finds himself working for someone else less talented and wonders ‘why am I working for you?’ so decides to start up on his own.

        “Pull factors” include peoples increasing desires to exploit an opportunity, turning their hobby into a business, the motivation to work independently and when people become older they sometimes inherit money; they sometimes put this money into a business venture they perhaps previously couldn’t afford.               

The failure rate for small businesses is very high. The probability that your new business will make it past the third year is less than 25%. In other words, over three-quarters of entrepreneurial dreams land up as a distressing memory. Statistics are however, sometimes deceiving. Many start-ups merge with other ventures or act as a launch pad for other business activities. However, the percent of small businesses that fail is still extremely high.

        When small businesses fail the owners are usually quick to blame the government or the economy. However many people have actually made their fortunes during recessions or tough times, whereas others have failed just as easily in boom times. In fact according to a recent survey outside influences such as inflation and economic conditions and union problems only accounted for 18.6% of the reasons why small businesses fail. This leads me to believe that the 81.4% of the small businesses surveyed failed because of issues under their control2. So 82% of the time when small businesses fail, the owners really could have done something differently to stop that from happening.

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There have been many internal reasons linked with the failure of small businesses. One problem, which many small businesses often have, is the lack of capital or funds. Small businesses often have a lack of funds, as large banks like larger businesses and do not back them. The amount of money needed to start up and keep a business running should be known before the company is even set up. Another problem is that small business owners often tend to take out too much money from their business for personal reasons such as holidays or the purchasing of a new ...

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