BUSI 101 Week 7 Group Research Paper Final Example

Why Small Businesses Fail and What Improves Their Chances of Survival

Introduction

A couple opens a neighborhood restaurant with their savings, a family loan and years of experience as diners rather than as restaurant workers. The food is good, but in the second year a slow winter drains their cash, a broken freezer costs more than they can cover, and they close. Stories like theirs are common enough that many people assume most small businesses simply fail. The reality is more complicated. Many new firms do close within their first decade, but not every closure is a failure, and research has identified characteristics that make survival more likely. Our argument is that luck plays a smaller part than three things an owner controls: knowing the industry before entering it, starting with enough money, and using a plan to steer the first decisions.

Nickels et al. (2018) define a small business as one that is independently owned and operated, not dominant in its field and meeting size standards set by the Small Business Administration. They note that small businesses employ a large share of the private workforce and create many new jobs. Their importance to the economy makes the question of why they fail more than an academic one.

How Often New Businesses Close

Federal establishment data give the clearest picture of survival. The Bureau of Labor Statistics tracks every new business establishment through its Business Employment Dynamics program, and its survival tables show that roughly one in five new establishments closes within its first year and about half close within five years, with survival continuing to fall over the following decade (U.S. Bureau of Labor Statistics, n.d.). These figures have been broadly stable for many years, through good economies and bad, which suggests that the causes lie partly in the nature of new businesses rather than only in economic conditions.

Closure Is Not the Same as Failure

Survival statistics count every closure, but a closing is not always a failure. Headd (2003) followed businesses that closed and found that about a third of their owners described the business as successful at the time it closed. Some owners retired, some sold the business or moved on to other opportunities, and some closed a profitable business for personal reasons. A business that closes on its owner's own terms has not failed in any meaningful sense.

This distinction matters for interpreting the data. If a third of closures are voluntary exits by owners of healthy firms, the share of businesses that fail in the sense of losing money and closing unwillingly is lower than survival tables suggest. It also means that research on survival must be read with care, since a study that treats all closures alike will mix successful exits with genuine failures.

The Liabilities of Newness and Smallness

Even allowing for voluntary exits, new firms close at higher rates than established ones. Freeman et al. (1983) studied organizational death rates and found that they were highest in the early years and declined as organizations aged, a pattern they called the liability of newness. New organizations must learn new roles, build relationships with customers and suppliers, and establish routines, all while lacking the track record that would earn them trust and credit.

Smallness adds to the problem. Bruderl et al. (1992) followed newly founded businesses in Germany and found that firms that started larger, with more employees and more capital, survived longer than those that started small. Founders who brought more schooling and more years on the job also kept their firms alive longer. Small firms have less margin for error: a single lost customer, a broken machine or a slow season can do far more damage to a business with three employees than to one with three hundred. The restaurant in the introduction suffered from both liabilities, a new firm with little cushion when the winter slowed sales.

The Founder's Experience and Capital

If newness and smallness are hazards, the founder's resources are the main protection. Cooper et al. (1994) studied new ventures and found that both human capital, especially education and experience in the same industry, and financial capital at startup predicted whether firms survived and grew. Founders who had worked in the industry knew its customers, suppliers and costs, and founders who started with more money could survive early losses long enough to learn.

How new firms are financed helps explain why capital matters. Tracking thousands of American startups, Robb and Robinson (2014) showed that bank credit, frequently backed by the founder's house or savings, supplied far more startup money than the friends, relatives or angel investors of popular imagination. A founder who cannot borrow enough at the start may be forced to close when the first setback arrives. Nickels et al. (2018) list inadequate financing and inexperienced management among the main causes of small business failure, which agrees with this research.

Does Planning Help?

Advice to new owners nearly always includes writing a business plan, but the evidence on planning is mixed. Delmar and Shane (2003) tracked Swedish ventures from their earliest months; those whose founders put a plan on paper before other steps were more often still operating later and had made quicker progress building their products and teams. They argued that planning helps founders make decisions faster and coordinate early activities.

Brinckmann et al. (2010) combined many studies of planning in small firms and found that planning was positively related to performance, but the effect was modest and was stronger for established small firms than for new ones. They suggested that new firms face so much uncertainty that detailed plans quickly go out of date, while established firms have the information to plan well.

A broader meta-analysis of new venture success factors by Song et al. (2008) found that some factors, such as the founder's industry experience, the firm's integration with its supply chain and the scope of its market, were consistently related to performance, while others were not. Read together, these studies suggest that planning helps when it is used to learn and coordinate rather than to predict the future. The best plan for a new firm is a short, practical document that is revised as the market responds, not a long forecast written once to satisfy a lender.

Cash Flow: Where the Causes Meet

The causes described so far tend to show up in one place, the business's cash. Nickels et al. (2018) stress that a business can be profitable on paper and still fail because it runs out of cash, for example when customers pay slowly while suppliers and employees must be paid on time. Newness makes cash flow harder to predict, smallness leaves less of a buffer, inexperience makes it harder to estimate costs and seasonal swings, and thin starting capital means there is little in reserve when a forecast proves wrong. A founder who has worked in the industry knows when the slow months come; a founder with adequate capital can carry the business through them.

This connection suggests that much of the research on survival is, in practical terms, research on how owners manage cash. Robb and Robinson (2014) found that new firms depend heavily on bank credit, and banks lend more readily to owners who can show a realistic budget and some personal investment at risk. Planning matters here as well: a cash forecast for the first year, revised each month, is the kind of plan that Delmar and Shane (2003) found helps founders organize their early decisions, and it is far more useful to a new owner than a long narrative written for a lender.

Is Survival the Right Measure?

A fair review should also ask whether survival is the right way to judge a small business. Some businesses are meant to be temporary, such as a seasonal shop or a venture started to test an idea, and closing them on schedule is a sign of good management rather than failure. Others survive for years while earning their owners less than they could earn as employees, which is survival without success. Headd (2003) showed that owners' own judgments of success do not line up neatly with whether the business is still open. For this reason, the group's recommendations aim at helping owners make good decisions, including the decision to stop, rather than at keeping every business open as long as possible.

Recommendations for a New Owner

The research points to four practical recommendations. First, gain experience in the industry before starting a business in it, even if that means working for someone else for a few years. In the work of Cooper et al. (1994), prior time in the same industry stood out among the factors that kept new firms alive. Second, start with money enough to ride out about two lean years plus a cushion for surprises, because young, small firms are most fragile in exactly that period. Third, write a plan, but treat it as a tool for testing ideas and coordinating work, and revise it regularly. Fourth, keep the distinction between closure and failure in mind: an owner who sets clear conditions for when to stop can close a business before losses consume personal savings, which is itself a successful outcome.

Had the couple in the introduction followed these recommendations, they might have worked in a restaurant first, started with a larger cash reserve and planned for a slow winter. None of these steps guarantees survival, but each addresses a cause the research has identified. The recommendations also have a cost, since gaining experience and saving more capital delay the start of a business, and some opportunities will not wait. A founder who decides to move quickly can still reduce risk by starting smaller, testing demand before committing to long leases and arranging a line of credit before it is needed.

A Biblical Perspective

Scripture offers a principle that fits the evidence closely. In one of His teachings, Jesus pictured a builder who starts a tower without tallying the expense and is left with a bare foundation that neighbors laugh at (English Standard Version Bible, 2001/2016, Luke 14:28-30). The passage is about the cost of following Christ, but the image it uses is a practical one that every business owner understands. Counting the cost means honest planning, adequate resources and a realistic view of one's own abilities, exactly the factors the research associates with survival. A Christian entrepreneur can pursue a business as a calling while also recognizing that faithfulness includes careful stewardship of the money and the people involved.

Conclusion

Many small businesses close within their first decade, but survival is not simply a matter of chance. Some closures are successful exits, and among the businesses that do fail, the causes include the vulnerabilities of being new and small, too little industry experience and too little starting capital. Planning helps when it guides action rather than predicts the future. The evidence is imperfect, since closure counts blend owners who chose to leave with owners who were forced out, and several key studies draw on one nation or one decade. Even so, the studies point in one direction often enough to give a new owner real direction. Experience, capital and practical planning will not remove the risks of starting a business, but they shift the odds in the owner's favor.

References

Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. https://doi.org/10.1016/j.jbusvent.2008.10.007

Bruderl, J., Preisendorfer, P., & Ziegler, R. (1992). Survival chances of newly founded business organizations. American Sociological Review, 57(2), 227-242. https://doi.org/10.2307/2096207

Cooper, A. C., Gimeno-Gascon, F. J., & Woo, C. Y. (1994). Initial human and financial capital as predictors of new venture performance. Journal of Business Venturing, 9(5), 371-395. https://doi.org/10.1016/0883-9026(94)90013-2

Delmar, F., & Shane, S. (2003). Does business planning facilitate the development of new ventures? Strategic Management Journal, 24(12), 1165-1185. https://doi.org/10.1002/smj.349

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Freeman, J., Carroll, G. R., & Hannan, M. T. (1983). The liability of newness: Age dependence in organizational death rates. American Sociological Review, 48(5), 692-710. https://doi.org/10.2307/2094928

Headd, B. (2003). Redefining business success: Distinguishing between closure and failure. Small Business Economics, 21(1), 51-61. https://doi.org/10.1023/A:1024433630958

Nickels, W. G., McHugh, J. M., & McHugh, S. M. (2018). Understanding business (12th ed.). McGraw-Hill Education.

Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153-179. https://doi.org/10.1093/rfs/hhs072

Song, M., Podoynitsyna, K., van der Bij, H., & Halman, J. I. M. (2008). Success factors in new ventures: A meta-analysis. Journal of Product Innovation Management, 25(1), 7-27. https://doi.org/10.1111/j.1540-5885.2007.00280.x

U.S. Bureau of Labor Statistics. (n.d.). Business employment dynamics: Establishment age and survival data.