Business Failure Research Provides a Guide for Better Accounting

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
Fraud
Inadequate capital
Low sales
Over investment in fixed assets
Personal use of business funds
Poor cash flow management
Poor credit arrangement management
Poor inventory management
Pricing not sufficient to cover overhead and to earn sufficient profits
Too much debt
Unexpected growth

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.