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Why do many small businesses fail - Research Paper Example

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The economic strength of any country is defined by the amount of productivity and efficiency practiced by the different stake holders of the system. These range from individual workers, corporations, small business owners to government regulators…
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Why do many small businesses fail
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Why do many small businesses fail

Download file to see previous pages... From these Small Businesses are considered to be the most important economical contributors with respect to their social impact, and employment and innovation opportunities. In the US especially the perception of the small business owner is tied inexplicably to the ideals of hard work leading to success and the importance of the individual. Before verifying any such claims or talking in-depth about the problems and opportunities present for this sector, one must first define ‘Small Business’. While researchers provide their own specific parameters and variables for defining the term “There is no inherent definition of a "small" business.” (Priest 2003). For the US market, any business having 500 or less employees is considered a small business, with a significant amount of these having less than 20 workers. But the advantages associated with small businesses in general like more flexibility, an innovative environment, enhancing of entrepreneurial skills etc cannot be fully realized even in the relatively smaller size of 500 workers. For the purpose of this paper, the following description coined by the Wiltshire Committee (Australia) will be considered the standard for a small business “A business in which one or two persons are required to make all the critical management decisions: finance, accounting, personnel, purchasing, processing or servicing, marketing, selling, without the aid of internal specialists and with specific knowledge in only one or two functional areas” (1971). The decision about the ideal firm size in the economy is usually determined by the relationship between managerial efficiencies (costs) and market transaction costs- if a small person team can perform efficiently in a small market while keeping their transaction costs low the small business model will be suitable to them. From an academic point of view claims about the social and economic importance have to be empirically proved before any further discussion can be built upon them. At this time, there are no clear normative grounds which substantiate the claims about the significant contribution of Small businesses to overall revenue and employment generation (Priest, 2003); at the most the contributions are equal to that provided by large conglomerates and corporations. However, the rate of failure of small businesses is still a cause of concern for academics and professionals alike because there are some specific proven benefits associated with small businesses with cannot be provided by large firms working on economies of scale and mass production. These pertain to particularized customer demands in small demand markets; a small size market with demands for personalization can only be met by smaller businesses and the society benefits from the increased welfare provided by choice. Failure of the Small business is an accepted phenomenon in the market. In a study done by Inc. magazine and the National Business Incubator Association (NBIA) Statistics it was shown that 80% of new businesses fail within their first year. According to the Small Business Association In 2002, an estimated 550,100 new businesses were established in the U.S., while an estimated 584,000 closed their doors for good bringing the growth rate of small businesses to negative. From those that survive the first year, 8 out of 10 new businesses fail within the first three years. (Mason, 2012). This trend is not associated with US alone; studies in diverse nations like South Africa, Australia, UK, South East Asia have shown the same. The reasons behind these failures can be broadly categorized into External and Internal factors. External factors are those which can only be ...Download file to see next pagesRead More
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