Pushing Small Business Past The Five-Year Mark

Why do small businesses fail? New research from SME accounting firm Xero wanted to know why, exactly, only half of small businesses in the U.S. make it to the five-year mark, according to the Bureau of Labor Statistics. In the U.K., that figure is even less, with just 41 percent of small businesses reaching their fifth birthday, according to the Office for National Statistics.

The company surveyed 2,000 small business owners in the U.S. and U.K. to uncover the culprits behind startup failure, and the factors behind small business resilience.

The Xero “Make or Break” report uncovered an array of commonalities between successful small businesses, from financial management to spending time with family. As it turns out, small business failures cannot always put the blame entirely on the money.

Financial Factors

Naturally, money plays a major role in the success of a business. Xero found that successful small business owners are willing to spend money to make money. Nearly half (49 percent) of those surveyed said they spend money on social media, advertising and PR campaigns, while just 20 percent of failed small business owners did the same.

[bctt tweet=”Successful small business owners are willing to spend money to make money. “]

Further, Xero found that for SMB owners that failed, they largely agree that they should have invested in marketing and customer service efforts.

Successful SME owners also spend money on the tools to manage their finances. Fifty-eight percent of the successful ones said they use software to manage finances; only 14 percent of failed SMB owners, however, said the same.

For those small business owners that pointed to business reasons (not personal reasons) for the failure of their company, 65 percent pointed specifically to financial issues like access to capital or cashflow visibility. Xero concluded that striking a relationship with a bookkeeper or accountant, or investing in technology and accounting tools, is key to the financial success of a small business.

B2B Resilience

Interestingly, Xero’s research found that selling products, versus selling a service, is a greater indicator of failure; more than twice as many failed SMBs, the report found, sold products (41 percent, while just 19 percent of successful small businesses sold products). More than half of successful small businesses (59 percent) sold services.

This factor also points to the resilience of B2B small businesses. According to Xero, about half (49 percent) of small business failures focused on individuals as their customer base. That compares with just 28 percent of successful SMBs that catered to consumers. Meanwhile, about half of the surviving small businesses focused on other businesses as their top customer base, the report found.

Human Factors 

As the holiday season commences, it is perhaps appropriate that Xero found that the most successful small businesses were the ones that still had the time to be with family.

[bctt tweet=”The most successful small businesses were the ones that still had the time for family.”]

According to the stats, the majority of small business owners, both successful and not, said having the time to spend with family on weekends and evenings is key to being an effective business owner. “That’s a far cry from the image of sleep-deprived business owners guzzling coffee at all hours to keep their company afloat,” the report said.

There are other, more human factors to the success of a small business, too. For example, the research concluded that successful small business owners embrace a mentor, support group or other entity when in need of advice. One-third of successful SMB owners have turned to such an entity, compared to just 14 percent of failed SMB owners.

Xero’s research uncovers some hard facts about the human side of starting, and successfully maintaining, a business. According to Xero President Russ Fujioka, it’s this mix of the personal and the professional that can push small businesses beyond the five-year lifespan.

“To build a successful business, which is sustainable in the long term, you need to ensure the other areas of your life don’t get neglected,” he said in a statement, pointing to the mesh of personal and professional aspects of entrepreneurship, like striking a close relationship with a professional accountant.

“Small business owners should be aiming to achieve work/life integration, not work/life balance,” Fujioka added. “By doing this you give yourself more flexibility and set yourself up better for success.”