Xero has published some research based on responses from the UK and US revealing five key reasons why small businesses fail in the first few years. The results are a mix of the expected and unexpected.
In the US at least 50% of small businesses fail within the first five years of launching. Considering that 45% of GDP and 80% of jobs are provided by small businesses this is a significant statistic and one that the research intended to shed light on. Perhaps surprisingly the failure statistics have been fairly consistent over the period for which the results have been collected by the US Bureau of Labor statistics, but there may be some answers.
In the UK at the start of 2014, 5.2 million small businesses accounted for 48% (12.1 million) of UK private sector employment and contributed £1.2 trillion or 33% of private sector turnover. The failure statistic is similar to the US with more than half of businesses failing within the first five years according to the Telegraph.
The research was carried out amongst 2087 respondents including 301 former business owners in the US and UK, there were 1052 UK respondents and 1035 US respondents. Each of the business surveyed had no more than 20 employees at its peak even before it closed. The research revealed five key reasons that help businesses to survive.
Reason 1: Family life is important
Perhaps surprisingly successful entrepreneurs make time for family life. 58% of respondents stated that they spent time in the evenings with their family and that this was a crucial part of their effectiveness as a business owner. 55% also stated that it was important to keep weekends free for loved ones, this latter statistic may be lower as many small businesses operate at weekends so it will sometimes be difficult to split out what is actually possible.
Xero U.S. President Russ Fujioka commented: “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. Running a business isn’t easy, by taking time out to spend with your family or friends you often find you return to work energized with a clear perspective on what you need to achieve.
“Small business owners should be aiming to achieve work/life integration, not work/life balance. By doing this you give yourself more flexibility and set yourself up better for success.”
Reason 2: You cannot work 24 hours a day
In this modern connected world it is sometimes impossible to be disconnected from work. With iPads, mobile phones and a global business demanding 24 hours a day coverage it is sometimes impossible to switch off. Humans are not geared to working 24 hours a day though and need personal time and sleep. While many of the respondents said that they made time for family and themselves it is difficult to turn off completely.
Some business owners actually take the step of switching off their phones and laptops after business hours. It will come as a surprise to many that the number that do this was as high as 29%. Without further statistics to show whether those businesses were likely to receive out of hours calls it is difficult to validate that statistic though.
Dr. Holden, Director, The Happiness project said: “What’s the point of success if you’re not enjoying it? Those that step away, switch off, and make time for the people they love, are most likely to be successful.“
Reason 3: Every Cloud has a silver lining
Successful businesses need a positive mindset from its leaders. The people who succeed see failure as a learning curve to something greater. Mistakes can be made and learnt from and the trajectory for success is rarely a straight road, just think of the first Apple phone.
Reason 4: You cannot be an expert at everything
Small business owners are expected to be responsible a whole range of jobs, this does not mean that they have to be expert in everything. Successful business leaders take advice from different advisors and mentors be they business, financial or even just customers. One third of successful entrepreneurs say that they turned to their mentors. Only 14% of those who had to close their business did the same. One also wonders whether that latter statistic was based on them turning to mentors when it was too late.
Companies looking for seed funding should choose their venture capital partners wisely. It is not enough just to get money any more, but better to find a match with a VC firm who will actually add value to the business through experience in the chosen market.
It is also not enough just to have a financial advisor. The relationship or rather the strength of the relationship is just as important. Trust is a key factor, but being able to describe a relationship as excellent means that the chances of success will be increased because the output from that relationship is likely to be more meaningful.
Reason 5: Cash Flow is still the king of failure
A whopping 65% blamed the failure of their business on financial issues, top of the list was cash flow although secondlary reasons were cited such as lack of visibility and access to capital, these could also be equated to cash flow.
For Xero this is the key element where they believe that they can make a difference to those companies and the research focused down onto this aspect a little deeper. The research found that 6 in 10 of successful businesses used software to manage their finances while only 14% of the failures had done so. The statistics were less stark when small businesses were asked about customer service software (31% vs 20%).
Modern financial applications such as Xero let business concentrate on their business, not on the finances. It delivers their cash flow projections to their mobile or tablet instantly without having to wade through spreadsheets. This means that strategic or stock investments decisions can be made with better information to hand. Born in the cloud means that the investment is initially small, there is no reason to buy servers or software straight away as a capital investment, instead these become manageable operational costs
Small business is becoming more tech savvy
Small business seem to understand that they need technology to grow with 86% claiming that they use technology to increase productivity. Unfortunately there was no analysis of what technology they felt was the most important.
Is a coffee machine technology for example? What was established is that nearly half (49%) use business apps and a third integrate mobile payment technology into their service offering. Only a quarter use business planning tools, though one suspects that the many of the rest use a spreadsheet of some description.
The adoption of fintech such as Xero clearly helps small businesses succeed and although Xero are not the only company in the small business market, with Sage, Intuit and others each making their play for cloud they are one of the few born in the cloud solutions.
Interestingly the UK entrepreneurs are more familiar with crowdfunding, although only 5% have actually tried it. It will be very interesting to see if that figure improves over the next few years. The success of Kickstarter for example has proven that crowdfunding works very well for some markets and there may be opportunities for others.
These are not the only five ways to make your business a success and should not be taken as such. Running a small business, especially selling products rather than services, is fraught with many different risks but they are all things that should be considered.
The research revealed other insights from its survey and can be found here. What Xero are keen to point out is that for its customers over the last five years the success rate reflects that helping with Reason Five demonstrates that it may be one of the most important of all.
“In the U.S., 95% of Xero customers survive their first year vs. 79% for the average. In the U.K. 97% of Xero customers make it that far compared to an average rate of 91%. The pattern becomes even more distinct over longer timeframes. At the five year point, 85% of Xero customers in the U.S. are still up and running, while the industry average is 50%. In the U.K. the difference is greater still, with 88% of Xero customers operating after five years, compared to an industry average of just 41%.”
Statistics like this are hard to validate, as it seems likely that Xero are still in touch with the customers that succeed and the demographic of the survey methodology was not completely revealed. It is also a self selecting group as some of the customers may have chosen to move to a competitor rather than stay with Xero.
Despite this the report is certainly interesting and opens up a number of insights into the modern life of entrepreneurs.