If you do a quick search on the internet, you will uncover hundreds of experts, coaches, accountants, journalists and government organizations that quote the statistic “8 out of 10 business fail in the first year”. However, the fact that the statistic is widely touted doesn’t necessarily mean that it’s true or backed up by empirical evidence.
So what is the truth? I searched the internet and couldn’t find confirmation of any study that was done to back-up this statistic (that 8 out of 10 businesses fail) by a reputable or well-known bureau. What I did in fact find was some evidence to the contrary. According to credit reference checking agency Veda Advantage, only a small percentage of new businesses close in their first 12-months of business.
What is the exact amount, you ask? Would you believe, less than two percent?
However, they assert another 32 percent close their doors between their second and fifth year of operations, while 21 percent wind up between the sixth and ninth.
So, that is the good news. However, as you can probably guess, it’s not ALL good news.
Just because a start-up doesn’t go under in the first 12 months, doesn’t mean that the owner is running a successful enterprise. I wonder if anyone has bothered to measure how many of the businesses who survived:
- Paid the owner a wage that was at least equivalent to what he/she could have earned elsewhere as an employee?
- Generated a profit and positive cash flow? and
- Had enough working capital to service their debt, pay taxes and suppliers etc. as they came due?
The first few years of business are incredibly risky. In working with hundreds of business owners, we have found that the large majority opt to forgo their salary or inject more equity to prevent them from going under prematurely. What this means is that, while they may not have “technically” gone under, these fledgling enterprises are far from commercially viable and successful.
Statistics can be both helpful and misleading at the same time. It is easy to assert figures but more difficult to substantiate their veracity or explain the implications thereof.
The author of an article or press release will often use statistics to capture your attention and motivate action. That’s why people use statistics – numbers are persuasive and have an aura of authority. A statistic like – 8 out of 10 businesses fail – gets attention, doesn’t it? Whether this data is accurate or not, is only half the story. As a business owner or manager, we must look deeper to find the insights that we can take away and use to improve our results.
Personally, I don’t care what percentage goes under. No matter how long you’ve been operating, if you’re not getting paid a salary, producing profit and generating positive cash flow, you’re not running a successful company. Closing your doors is only half the story. The doors may very well be wide open, but technically, no one is there.