New small businesses have about a 50% probability of lasting
more than 4 years. This is a fairly
well-known, and probably the most reliable, statistic about this
conclusion. This statistic can be found
by searching the Internet. For example,
reference to the statistic can be found at two sites (click here and here),
which are associated with the US Bureau of Labor Statistics, a Department of
Commerce agency. This statistic is based
on US Census Bureau survey data obtained from US businesses.
What are the reasons for business failures? This is a question that many business
researchers and analysts ponder and pursue the answer to. I researched the Internet to find an answer
and found many lists of possible (suggested) causes for business failure for
small businesses. Nothing found
suggests that any one cause can be shown to account for most business
failures.
But rather, my Internet research found more than 40 causes
suggested by various business researches and analysts. Many of the 40 possible causes are identified
at these three websites: the first, a US
Small Business Administration site (click here); the second, (click here) (a
PDF file) shows a study conducted for the Washington State Governor; and the
third, the best-guess opinion of a long-term, and presumably knowledgeable,
business researcher and analyst (click here).
Other similar websites add additional causes not identified at these
sites. Many of the lists at these websites
identify the same causes, with some of the sites giving a ranking of the most
likely to less likely. However, I did not find statistical studies that show
the predominance of some causes over other causes.
In analyzing these lists, I realized that several of the
suggested business failure causes might be prevented by good accounting and the
competent analysis of the accounting data.
This suggested to me that these accounting–related causes could serve to
alert the small business owner and accountant to critical problems that good
accounting can address and, in doing so, guide the business decision-makers on
ways to reduce the risk of business failing.
The 12 causes on the lists I analyzed that might be averted by
using good accounting, its analysis, and the correct responses to that analysis
are:
Controlling costs
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Fraud
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Inadequate capital
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Low sales
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Over investment in fixed assets
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Personal use of business funds
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Poor cash flow management
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Poor credit arrangement management
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Poor inventory management
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Pricing not sufficient to cover overhead
and to earn sufficient profits
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Too much debt
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Unexpected growth
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The consequences in each of these 12 potential problems could
be averted by using good, sound accounting practices, competent analysis of the
accounting results, and then the right responses to the analysis.
Although there is no one cause for business failure, a
significant number of causes that business analysts have identified that lead
to business failure are accounting-related.
By accounting-related, I mean the cause lends itself to correction with
good accounting. Be aware of this list
of 12 as you run your business and use accounting resources.
