Why Do Businesses Fail?

Why Do Businesses Fail?

For any new entrepreneur, it’s natural to be optimistic.

Whether that person has a world-changing idea or is starting a new coffee shop, the glass has to be half full that the business will succeed. Otherwise, what is the point of starting a new company in the first place?

The Harsh Reality

Today’s infographic from InsuranceQuotes shows that this entrepreneurial enthusiasm might be misplaced.

The reality is that it’s a cruel world out there for entrepreneurs. The Bureau of Labor Statistics in the United States keeps a sobering tally of how often businesses fail, and here are the numbers from 1995-2015:

Statistically speaking, there is over a 50% chance that any new business is toast in five years.

And the record for tech startups? It’s even worse, with 90% of all startups eventually failing.

Business Failure Can Be Complex

It takes the confluence of many factors to build a successful business: assembling the right team at the right time, achieving product/market fit, staying on top of the competition, and getting the necessary funding are just some of the key elements to success.

In the same vein, it is often hard to pin down just one reason for failure, since everything is so interconnected.

For example, one study by U.S. Bank shows that 82% of small businesses fail because of cash flow mismanagement. This is a fair point, since without cash flow there is no business.

However, while cash flow may end up being the final nail in the coffin for many businesses, it’s also fair to say that a lack of cash flow can be the symptom of other problems. What if the company is going after the wrong market? What if the team is dysfunctional and unmotivated? What if the company isn’t differentiated enough to compete?

With any of these situations playing out, it should be no surprise that sales aren’t coming in like expected, which would certainly tank cash flow. At the same time, a company with the right team and product should be able to make swift changes to right the ship from any chronic issues.

Some Reasons Businesses Fail

With the complexity of business failure in mind, here are some of the commonly listed reasons for why businesses fail:

• 82% experience cash flow problems
• 42% find that there is an insufficient need for their product or service
• 29% run out of cash
• 23% do not have the right team
• 19% are out-competed

Lastly, for a full list of reasons for why businesses fail, see this infographic showing 20 common reasons why startups fail.