What Makes Small Businesses Sink or Swim?

What Makes Small Businesses Sink or Swim? Because small businesses play such an important role in today's challenging economy, it is of critical importance these companies have the best chance of success and stave off failure in their first few years. There are several primary reasons start-ups fail, the most important being lack of experience, planning. and investment capital. These three key needs are highly interdependent and predictive of many other reasons for success and failure. Role of Small Businesses in U.S. Employs 50%+ of all private sector employees Pays 44% of U.S. private payroll Generated 64% of new Creates 50%+ of jobs within a 15-year period non-farm private GDP Makes up 97.3% percent of all identified exporters Produced 30.2% of the known Produces 13 times more Hires 40% high-tech workers (e.g. scientists, engineers, and computer programmers) patents per employee than large patent firms export value in 2007 U.S. Small Business Profile Success Rates Years 1 Through 10 Businesses that make it past the hurdles of the first few years have a much greater chance of long-term 93.1% 57.1% success. have annual revenues of have revenues of 85% less than $250,000 less than $25,000 70% | family owned 2 28.2% 77% owned by the founder 62% 20% purchased from someone else 55% 4 2.4% inherited 50% 47% 51.6% 44% business are home-based 41% 8. 38% K62.9% 35% 10 of home-based businesses have no employees Voluntary closures us. Failures There is a big difference between voluntary closures and failures, which are due to insolvency, bankruptcy, or legal action. Census Bureau data, however, tends to lump both voluntary closures and failures together, making the failures rates look much more daunting. 31,849 net gain 2001 7.2% 553,291 585,140 17,140 net gain 2002 586,890 569,750 6.6% percent of closures that were bankruptcies firms with employees that closed their doors businesses launched closed Startup-Failure Ratio: A Comparison 10:1 10% 1.1:1 91% Failed Successful D&B's ratio for 1994 Census ratio for 1994 Reasons for failure 1 Lack of experience 2 Insufficient capital 3 Poor location Out of 4 Poor inventory management Business W 5 Over-investment in fixed assets 6 Poor credit arrangements 7 Personal use of business funds Human Capital 8 Unexpected growth Lack of experience is the most important cause of failure and often is the cause of failure reasons 2 through 10. In one study, for example, individuals who acquired experience working in family business were much more likely to succeed in another business. 9 Competition 10 Low sales "Failing to plan is planning to fail" -Alan Lakein Secured a loan: From a survey of 2,887 Palo Alto Software's Business Plan Pro users, those who completed a business plan were twice as likely to grow their business or 36% 18% Secured investment capital: secure capital. 36% 18% Completed a business plan: Saw business growth: Yes 64% No 43% A third party, the University of Oregon Department of Economics verified the validity of the data. A study by Babson College suggested owners who wrote a business plan did not achieve any greater success than those who did not, except when it came to money. Results indicated business plans were very important in securing investment capital. Remembering the SBA's list of 10 reasons for business failure: failing to secure capital is number 2. Further tips You can visit... Future entrepreneurs can also.. A local SBA office Get a mentor Small Business Development Centers Hire a business consultant SCORE Read leadership and business planning books Women's Business Centers Get work experience to learn business leadership skills Veterans Business Outreach Centers Look into college business and entrepreneurship programs U.S. Export Assistant Centers Procurement and Technical Assistant Centers Sources Fairlie, Robert W. and Robb, Alicia (2007) "Families, Human U.S. Dept. of Commerce, Bureau of the Capital, and Small Business: Evidence from the Characteristics of Census and International Trade Administration Business Owners Survey," Industrial & Labor Relations Review, Advocacy-funded research by Kathryn Kobe, 2007 Vol. 60, No. 2, article 4.Palo Alto Software CHI Research, 2003 Wall Street Journal, "Enterprise: Do Start-ups Really Need U.S. Dept. of Labor, Bureau of Labor Statistics. U.S. Small Business Administration U.S. Economic Census "2007 Survey of Business Owners" U.S. Census Bureau David Birch, a former head of a research company Formal Business Plans" Babson College Headd, Brian. "Business Success: Factors leading to surviving and closing successfully." Center for Economic Studies. U.S. Census Bureau. November 2000 Inc., "Business Failure and Dissolution" Business Enterprise U.S. Bureau of the Census: Small Business Management, Michael D. Ames www.census.gov/prod/2/gen/96statab/business.pdf Dun & Bradstreet Corporation The Do-It-Yourself Business Book, Gustav Berle CreditDonkey