The study by the Small Business Administration (SBA) in 2002, showed that 23.7% of small businesses fail within two years of start-ups, 51.7% fails after 4 years, 62.7% fails after 6 years and 80 % fails after 10 years (Rogers and Makonnen, 2002, p. 15). The latest statistics from the SBA shows that seven out of 10 new businesses survive at least two years and about 50% survive for only five years. As for 2008, there were 627,200 new business startups and 595,600 small business closures and 43, 546 bankruptcies. These success and failure trends do not vary greatly across different industries and sectors (score.org, 2009).
Schaefer (2006) found that many entrepreneurs fail because they start their business for wrong decision and they run it with poor management. Those who failed with new businesses have been fund that they lack sufficient capital and proper planning. Many businesses fail due to its overexpansion and location factor as well.
Small businesses failing mainly because it experiences a number of problems related to money, capital, management and planning as these are the key components to the success (Pride, Hughes and Kapoor, 2009, p. 142). As detailed above, improper planning, insufficient capital and poor management are the major reasons for the failure of most small businesses.
The major red flags or alerts of the failure of a business are high debt ratio, because giving too much credit to the customers will eventually cause business failure. Inadequate stock, poor management, declining working capital and selling the goods below the cost price due to fierce rigorous competition are some other factors that very often cause failure of small businesses.
Strong cash flow is critical to the business success and thus many businesses fail because it lacks sufficient cash flow. When the business is experiencing gross loss and net loss, the outcome is that business will ultimately fail. Better management skill is