When people think about entrepreneurs they most often think of unicorn wins. The built-in-your-garage, scrappy startup that achieved the likes of Amazon, Facebook or Google.
And there is some merit to that thinking. When you build a successful company, something you created from your own effort, intuition and ingenuity, the upsides make it all worth the while.
But behind all of that glamour lies a very nasty truth: a lot... and we mean a lot... of small businesses fail.
So what makes up the difference between the unicorns and the failures? And can we, as accounting and bookkeeping professionals do anything to help?
Exactly How Many Business Fail?
First let's unpack the grim statistics. There are a lot of numbers floating around the internet on this subject. And a lot of them are likely outdated or inaccurate as this question is often used for marketing click-bait (a shocking and negative number?... let me see it!).
If you are actually researching the subject, the statistics are also a bit mired depending the specific wording you use in your queries. If you ask "how many new startups fail?" versus "how many small businesses fail?" you will get a different range of responses. This is because the word "startups" is most pretty synonymous with "tech startups" these days, as opposed to the new retail store that just opened up down the street.
Here at Helm we've gone through a lot of these statistics for our accounting and bookkeeping peers. We've even included them in our Definitive Guide to Cash Flow Advisory (which we update regularly so please bookmark it and subscribe for updates!). The short answer to the question "Exactly How Many Businesses Fail?": a lot more than you think.
If you looking at government data, most industrialized countries have relatively similar rates of business success and failure. More importantly, these rates are typically very consistent over time.
When looking at a five year time horizon:
- 50% of all US businesses survive
- 63% of all Canadian businesses survive
- 44% of all UK businesses survive
When looking at a ten year time horizon:
- 34% of all US businesses survive
- 43% of all Canadian businesses survive
This means that over the course of 10 years, 60% to 70% of all small businesses fail.
That's an abysmal number.
The silver lining? Caveats should be attached to these headline stats as they will most definitely contain issues in tracking and measurement. As an example: what exactly constitutes a failure? If a company merges with another and is no longer on record, how is that counted?
The main takeaway remains the same though. Most small businesses fail in the long run.
Even Though Most Businesses Fail, There Is Still Hope
Now that we've ruined everyone's day and made them question why they are likely running their own business (as that what most accountants and professionals are, or who they work for), let's interject a ray of hope.
According to the Xero Make or Break report businesses that are actively involved, and are on top of their finances are exponentially more likely to succeed. Over a 5 year time horizon, those using Xero's software had an 88% success rate.
This certainly isn't a plug for accounting software. We would surmise similar success rates on other accounting platforms. What this information highlights is that those who are willing to invest in financial systems markedly increase their ability to achieve success.
As an accountant, bookkeeper or business consultant, this places you in a powerful position to create success and value for your clients. You could quite literally tip the scales.
What Are Some Reasons Businesses Fail?
Just how can professionals tip those scales? First we need to know the main reasons businesses fail. Then we can gear our advice to mitigate those risks.
Lack Of Cash
A study done by the US Federal Reserve Banks in 2019 estimated that 64% of all businesses surveyed experienced financial challenges in the preceding 12 months. And 69% of these companies solved their challenges by using the owner's personal funds.
An Intuit study in 2019 found similar trends. In their small business survey 62% of respondents experienced at least one cash flow problem in their history, while 32% experienced more than one cash flow scare.
While it's hard to pin down whether cash flow issues were a result of low working capital or a deficiency of operating cash flow (or both), there is no question that cash flow issues are a primary driver of small business failures.
Lack Of Planning
Lack of strategic planning is also a common failing point.
While geared to tech startups, a CB Insights study found that 42% of new ventures failed as there was no market need for their product. Put a different way, these companies were focussed on solving an interesting problem, not solving the pain point of a large market.
It would make sense that the risk of business failure greatly increases without appropriate research and planning around:
The product or service itself
The marketing and operational strategies required to get the product or service to market
The financial requirements to make these strategies reality
Lack Of Skills And Experience
Another common reason for business failure is a lack of skills and experience within the venture.
The CB Insights report mentioned above also found that 23% of tech startups failed as their leadership team didn't have the right mix of skills and experiences.
This finding can unquestionably be applied to any new business. Most new ventures are founded by small teams, if not by individuals. This limits the expertise that the business has and can create stresses that larger, more diverse teams would face with greater ease.
How Can Professionals Help Businesses Avoid Failure?
There are some definite themes in the reasons for failure listed above. At a high level it would appear that most small businesses that fail:
Are limited in time, resources and skills
- Need strategic and operational guidance
They need someone to help fill their skill gaps, and help formulate and implement business plans and the ongoing activities required to achieve those goals.
Own The Financial Skill Gap
Most entrepreneurs that start are not trained or versed in financial management. While we would no doubt love to see a study in this area (how many business owners have financial expertise), most practitioners know from experience that small business owners are experts in their services and widgets, not accounting and bookkeeping. It's why they hire us in the first place.
This means that, by default, you already have the ability to fill a huge need for your client: their need for a financial partner (reason for failure: lack of skills and expertise).
The only caveat here is that it isn't enough to just be a processor of data. Whether your expertise is bookkeeping or tax returns, you have to offer that same expertise proactively. This moves you from a commoditized "necessary evil" to a trusted advisor.
Do The Financial Planning
A prime example of owning the financial skill gap? Providing the financial side of the business plan. In fact, even if it is the only part of the business plan that gets done, the venture is in an exponentially better spot to succeed (reason for failure: lack of planning).
Start at the high level. Create an account level forecast or financial roadmap for the next 12 months. Review it with your client to make sure it makes sense. Adjust it if need be.
Some points here:
Not sure on the difference between a budget versus forecast? Don't overthink it! The key piece is to proactively lay out the financial future of the business.
- Want an easy way to do all of the above in one spot? Spoiler alert: you can use Helm! Setup a demo to learn more.
After your financial roadmap is done it's a simple act of reviewing that plan from time to time, to ensure the business is running on target.
Manage The Cash!
This of course leads us to the last, and primary reason businesses fail: cash flow.
If you have filled the financial skill gap and created a roadmap for the next 12 months, the next step, and biggest value add to your clients is to manage that roadmap on an ongoing basis.
What good is a travel plan if you're not going to travel? Not much. The same is true with your financial roadmap.
In fact, this is why 50% to 60% of businesses that fail are profitable. The companies might have the skills and high level plans in place, but if the financial plans aren't managed actively and on an ongoing basis, the whole venture can quickly fall apart.
If you have ever asked yourself "why is cash flow advisory important?". This is why.
The amazing part is that there is no need to overcomplicate it. Again, if you have created your financial roadmap, it is a simple act of revisiting that plan on a frequent basis (weekly, bi-weekly or monthly) to ensure the business is running on target.
Ensure the cash position is looking good today and in the future. Advise the client appropriately. Rinse and repeat.
Of course, this process can be tedious and hard to scale, and that's the exact reason we built Helm. It automates the forecasting process while also allowing users to:
- Quickly and easily change the forecast based on any operational changes that have arisen
- Create unlimited scenarios to map out pivots, both large and small
- Make payments directly within the system (giving total optics and control over payables while saving time)
- Engage with clients in a collaborative and visual way
Watch Your Clients Succeed
If you follow the steps above your clients will be in an infinitely better spot to succeed. And in tipping their scales away from failure, you will also have likely created a new level of relationship and trust, which brings a range of business benefits to your own venture.
If you like what you've heard to this point, but are still unsure of where to start, we have a great offering of education and support program for our partners. You can learn more about our Accelerator Program here.
New to Helm? Book a demo with our sales team to see our amazing cash flow forecasting and cash management tool in action!
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