Why Small Businesses Fail.

And what we can do about it

Chances are that if you are an entrepreneur and start a small business, you won't make it past the five-year mark. Statistics tell us that small to medium-sized enterprises (SMEs) fail at a staggering rate. Sixty-eight per cent of those with less than five employees and 48% of those with between five and 99 employees fail within five years of start-up. These are hard statistics to digest, knowing that the SME sector employs millions of Canadians and contributes significantly to the Canadian economy.

Indeed, a reduction in the failure rate of small businesses would lead to tremendous economic benefits. There are approximately 1 million SMEs currently in business, employing between one and 500 people. If more than 500,000 of these are statistically destined to fail, just imagine the impact of saving a reasonable percentage of them. Consider also the impact if a larger percentage of SMEs were not only able to survive, but grow to be competitive players in the global marketplace.

There are many reasons for the failure rate of start-up businesses, including lack of adequate working capital, poor market selection, and rapidly changing external market conditions. However, the most significant reason for this high failure rate is the inability of SMEs to make adequate use of essential business and management practices. Many small firms fail to develop an initial plan, and those that do establish a plan fail to continually adjust and use it as a benchmarking tool.

If an SME is adept enough to survive start-up and early business life, it will grow, provided it displays competence and applies a particular mix of business skills. On the other hand, we know that relatively few SMEs grow to the point where they can be competitive in the global marketplace. The truth of the matter is that if an SME with potential does not use a particular set of business skills, it may not grow and be productive, competitive and profitable. Over time it will disappear. As our economy becomes more connected to the global marketplace, this lack of competitive presence for more than half of our small to medium-sized enterprises will seriously threaten our nation's wealth.

Typically, entrepreneurs start a business because they have an interest in a particular area and have related technical skills. However, management skills are not a prerequisite, and an entrepreneur will often rely on external advisors to provide off-line management advice. This, more often than not, means sitting with the advisor and reviewing periodic financial results on a historical basis. This is not enough.