Small businesses are considered to be the backbone of the economy. They drive innovation, provide jobs, and serve the interests of communities. However, the path to success for small businesses is not always smooth. In many aspiring entrepreneurs’ minds, the question would be how much of a percentage they have of succeeding in business if they dare to venture into it.
What percentage of small businesses succeed?
This post will define the statistics, describe the contributing factors to success, and join the debate on how different definitions of success affect the numbers. By the end of this post, you’ll both know the rate of success for a small business, and understand the major elements that cause variation.
Understanding Small Business Success Rates
Many sources will cite the failure rates for small businesses, and these can vary greatly between sources, according to the criteria for defining “successful.” Let us look at some of the frequently quoted statistics and what the basis was.
The Often-Quoted 20 % Rate of failure
One of the most frequently cited statistics is that 20% of small businesses fail within the first year. This figure is based upon data from the U.S. Bureau of Labor Statistics, and the implication in citing this figure is often that 80% of businesses remain successful after one year. This is a serious oversimplification of the real picture of small business success.
Survival Rates Over Time
Agriculture, forestry, fishing, and hunting: BLS data also indicates that:
- Approximately 50% of small businesses survive at least 5 years
- Approximately 33% survive 10 years or more
These statistics suggest that although a large number of businesses make it through the first year, surviving in the long term is significantly more challenging.
Determining the Success Rate
The success of small business can be influenced by a wide range of factors:
- Industry: Some industries experience more success than others. For instance, a business in health care and social assistance is expected to experience higher survival rates than one that is involved in construction or transportation.
- Location: The geographical location could be a factor. These variables encompass the state of the economy, competition, and demographic trends.
- Economic climate: The general economic environment prevailing in the country, particularly in terms of whether recession or growth prevails, is a very important factor in determining the success rate of small businesses.
- Size and business resources: Large/small businesses with back-up in terms of huge financial resources have a better likelihood of succeeding when compared to their smaller compatriots.
- Previous business experience: Entrepreneurs who have previous experience in the business or industry are known to have a higher success rate.
Defining Success: Beyond Survival
While survival is used as a measure of success, it’s important to mention that survival alone does not connote business success. Let’s look at other ways to define and measure small business success.
Profitability
The second key indicator of success is profitability. A 2018 study by SCORE, a nonprofit association for small businesses says:
- 40% of small businesses are profitable
- 30% break even
- 30% continuously lose money
This therefore means that as much as many businesses survive, not all lead to constant profitability.
Growth
The second aspect of business success is the growth of business. Business growth can be manifested in several ways such as:
Increased revenues
Geographical expansion
Increasing the level of employees within the firm
Product and service diversification
According to the Small Business Administration, in the United States, only about 1 in 12 small businesses stand at about 8.3% referred to as “high impact” businesses that have recorded a sharp increase in employment.
Satisfaction of the owner
Some other relative measures for success have to do with the owner’s satisfaction. A business owner’s satisfaction, according to a 2019 survey by Guidant Financial, looks something like this:
53% rate their happiness at work as an 8 or better on a scale of 1-10;
37% rate between 5-7
only 10% rated lower than 5.
This suggests that many small business owners find personal fulfillment in entrepreneurship, even if their businesses aren’t growing fast or increasing high in profitability.
Key Factors Contributing to Small Business Success
Knowing what contributes to the success of small businesses will help increase the overall success rates. Some of the most important key factors are:
- Solid Business Plan
A good business plan is rudimentary to any successful venture. It helps the entrepreneur:
- Identify his target market
- Know his competition
- Realistic financial forecasts
- Marketing plans
A good plan increases the probability that a business is going to raise funds for its running and tackle complications as it evolves.
- Financial Management
Proper financial management is key to small business success. This is done through:
- Keeping proper and accurate records
Managing cash flow - Properly costing and cost awareness
- Setting the right price for goods or services
Improper cash flow management is the chief reason for small business failure, causing around 82% of closure cases. That is according to the U.S. Ban account.
- Marketing and Customer Acquisition
Hitting the bull’s eye, successful small businesses have mechanisms in place to get and retain customers. This comprises:
- Clearly defining the target audience
- Creating a strong brand
- A mix of traditional and digital marketing strategies
- Ensuring excellent customer service
According to research by Constant Contact, 84% of small businesses employ one or more forms of digital marketing. Those who did report using multiple channels also reported higher success rates.
- Adaptability and Innovation
Adaptability in market conditions and innovativeness is a firm long-term-sustainable quality. This means:
Updating with industry trends
Keeping the doors open for change through new technologies
Improving products
Service
Shift when necessary
As disclosed in a study carried out by SAP in 2018, 80 % of the small businesses that underwent successful transformation indicated an improvement in profits.
- Strong Leadership and Team Management
An able team supporting effective leadership is the backbone of any small business. This includes:
The right appointment
Imbuing proper training
Values of a healthy work culture
Efficient delegating of tasks
According to a Salesforce survey, 47% of small business owners opine that hiring and retaining employees is one of the major challenges.
Challenges Faced by Small Businesses
The success rate of small businesses is enhanced through the proper identification of common challenges. Some of the major common challenges are:
- Capital Access
Many small businesses do not have adequate access to capital. For example, as shown in the Federal Reserve 2020 Small Business Credit Survey:
- 43% of small businesses applied for additional financing
- Only 51% of applicants received the entire amount they applied for
Inadequate capital access impacts growth and survival negatively when weathering economic downturns.
- Competition
Among the top challenges of small businesses, tight competition is always present, be it with other similar small businesses or large corporations. According to a survey by Guidant Financial in 2019, 19% of small business owners claimed that their greatest headache was competition. Business innovation and strong marketing strategies will have to be continuously pursued to keep up with the competition. 3. Time Management According to a 2019 survey by The Alternative Board, 63% of business owners work over 50 hours a week.
- 86% work on weekends
Poor time management might lead to burnout, which would bring undesirable effects on personal life and business success.
- Regulatory Compliance
Of course, all small businesses must navigate complex regulations and tax requirements. According to the National Small Business Association’s 2017 Small Business Regulations Survey, at the federal level:
- 44% of small businesses spend 40+ hours per year dealing with federal regulations
- The average annual regulatory cost per employee for small businesses is $11,724
Staying compliant can be difficult while taking care of the rest of the business.
Improving Small Business Success Rates
While the statistics may not be pretty regarding positive small business success rates, there are ways to overcome the obstacles. Following are some of the methods:
- Education and Training
Success rates may be dramatically boosted with education and training. These can include:
- Workshops and seminars
- Acquiring pertinent certifications
- Staying current with industry developments and practices
The SBA has free counseling services and inexpensive training programs that have greatly increased the success of small businesses.
- Mentorship and Networking
Having a mentor or being involved in a business network can help with the operation of a small business because it offers support and guidance in the running of a business. According to SCORE in its 2018 survey, 87% of small business owners indicated that having a mentor was “invaluable”.
Businesses receiving 3+ hours of mentoring reported higher revenues and increased business growth
- Embracing the Use of Technology
Adopting technology will give a small business the ability to streamline its operations and become more competitive. This would be achieved by the following technological advancements:
Use of cloud-based software in areas such as accounting, and project management
Customer relationship management, i.e., CRM
Adopting data analytics to enhance their decision-making capabilities
A 2018 Deloitte study showed that small businesses leveraging digital tools can increase their customer base by three times.
- Customer Experience
Increasing the rate of customer satisfaction can increase loyalty and word-of-mouth. In the survey done by PwC, it found:
73% of customer experience is an important factor in influencing purchasing decisions
65% think that a positive experience with a brand is more influential than a great advertisement
- How to Have a Sustainable Growth Strategy
Rather than growing the firm fast, successful small businesses focus on sustainable growth; which includes the careful management of cash, a profit-driven reinvestment strategy, and expanding only when the business is ready. According to a Kauffman Foundation study, companies with moderate growth have the best chances for long-term success.
Conclusion
And the success rate? That’s a horse of a different color. Some authorities cite that as high as 80% of small businesses survive the first year. That said, just about half have the juice in them to make it to that magic five-year mark. But survival itself is not all that indicates success.
It becomes more interesting when we add profitability, growth, and owner satisfaction into the mix. By these measures, approximately 40% comprise the population of profitable small businesses, and another 30% break even. In addition, over one-half of all small business owners indicate high levels of personal satisfaction; meaning that success portrays various aspects.
Success in small business is a tough row to hoe, with particular obstacles to overcome about limited access to capital, fierce competition, as well as regulatory burdens. By emphasizing the key success factors underpinning the operation of a small business through sound financial management, effective marketing, flexibility, and leadership, an entrepreneur can set his or her path toward successful business outcomes.
Knowledge, mentorship, technology, and even the creation of customer experience are the mechanisms by which small businesses will not only exist but thrive.
Ultimately, the statistics can be daunting regarding how small businesses fare, but they don’t tell the whole story. The prospective entrepreneur, with the right strategies, preparation, and mindset, will be able to help his or her company navigate the challenges of small business ownership and personally find ways to succeed.
Remember: Behind every statistic is a story of grit, ingenuity, and success. Regardless of whether you’re considering taking the first step into small business ownership or are already on your entrepreneurial pathway, foster a spirit of continual learning and improvement, be adaptive, and define your version of success. The path of entrepreneurship holds value just as its destination does, and in your way, you shall be a part of that percentage that not only survives but truly thrives.
