Why Do Two-thirds of Small Businesses Fail to Make Their Fifth Anniversary?

Why do two-thirds of small businesses fail to make their fifth anniversary?

Image by ShashiBellamkonda via Flickr

Statistics show that as much as two-thirds of small businesses don’t make it to their fifth anniversary.

Do they fail for a variety of reasons, or is there a common thread which causes this phenomenon to take place?

Organizations such as Dunn and Bradstreet track and analyze business failure and the reasons why they fail.

There really is a variety of reasons for small-business failure in the first five years of trading.

But perhaps the most prevalent and single biggest factor is a lack of understanding of the business and managerial inexperience or incompetence.

Image by ShashiBellamkonda via Flickr

A basic rule of business is don’t spend more money than you need to, budget and plan properly ,make sure you have what you need financially to meet projected needs as well as contingencies.

Majority of small businesses fail due to excessive expenditure or massive undercapitalization

Credit management is another key factor that will determine the success or failure of a small business.

While it is important to build a customer base and encourage sales, credit terms and conditions must not be liberal, the ability to be firm but polite with debtors is important.

Image by ShashiBellamkonda via Flickr

Collections must be on time and up to date.

Other factors which cause small business to fail in the first five years include pitfall such as

The acquisition of excessive fixed assets

Holding too much stock and building too much inventory due to over zealous and over optimistic sales projection figures