How many new businesses fail in the first year?
Traditionally, common lore of business practice has held that approximately 50 per cent of businesses fail in the first year. This number has also been held to increase dramatically in the first five years of running a business, when the number is claimed to rise as high as 90 to 95 per cent.
These numbers were used by professors and managers to emphasise the difficulty of starting and managing a business, and the amount of dedication and work required to make them succeed. The numbers from the latest research conducted by the Small Business Administration tell a different and more encouraging story. According to the SBA, about two-thirds, or 66 per cent last past the first two years, leaving only a third of businesses that fail within these two years. Extended to four years, the number of surviving businesses decreases to only 44 per cent, meaning that about 56 per cent of businesses fail at the five-year mark, a far cry from the 90 to 95 per cent previously claimed.
Still, half of new businesses failing within the first five years is a significant number, and studies attribute it to the same effects which others claimed were responsible for the inflated numbers. Primarily, businesses have an difficult time making a profit for their first years of business. Almost all businesses experience a loss when first beginning, and it is often several years before they can show a profit. New investors may not be willing to deal with these losses, and the business may not have enough capital to weather these first trial years. This general law applies to all new businesses unless they are branches of existing successful companies.
Other businesses fail for more strategic reasons. Businesses are sometimes begun for the wrong reasons, whether solely as a means to make money or for continuous success, and owners may not have the passion or persistence to keep running the business efficiently and learn from their mistakes. Many other factors can affect business success in these first years, including management philosophies and bad locations.