Why do 80% of small businesses fail?
The 80% statistic gets repeated constantly, but it’s not accurate. Bureau of Labor Statistics data shows about 20% of small businesses fail in the first year, roughly 50% by year five, and around 65% by year ten. Still not great odds, but not as catastrophic as the 80% figure suggests.
What matters more than the exact percentage is understanding why businesses fail. The reasons almost always trace back to money in some form.
Cash flow kills more businesses than anything else. A company can be profitable on paper and still close because it can’t cover payroll or pay suppliers on time. This happens constantly with businesses that invoice large jobs and wait 30, 60, or 90 days to collect. Profit isn’t cash. Plenty of technically successful businesses have died waiting for receivables to come in while bills kept arriving.
Poor pricing is another common cause. Many owners have no idea what it actually costs to deliver their product or service. They set prices based on competitors or gut feel, not real numbers. When true costs are higher than assumed, every sale digs a deeper hole. Contractors and service businesses run into this constantly when they don’t track job costs and labor accurately.
Lack of financial visibility connects most of these failures. Owners who don’t know their numbers can’t see problems building. Margins shrink for months before anyone notices. Cash reserves drain slowly. Certain customers or services lose money without anyone realizing it. By the time the bank account is empty, the damage was done long ago.
The businesses that survive tend to share common habits. They know their margins. They watch cash flow weekly, not yearly. They price based on actual costs. They catch problems early enough to fix them. None of this requires unusual intelligence or luck. It requires having accurate books and actually reviewing them.
Working with a Phoenix area bookkeeper who understands your industry helps you build these systems. But the real difference is whether you pay attention to the numbers once you have them. The owners who review financials monthly and plan for cash gaps are the ones still operating at year five and beyond. The ones who only look at the books at tax time are often the ones who don’t make it.
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More Questions
Do you need an accountant for a small LLC?
You're not legally required to hire one. But whether you should depends on your time, your comfort with tax rules, and how complicated your business actually is. Most LLC owners benefit from professional help at some point.
Read answerWhat taxes do you have to pay as a contractor?
Self-employment tax and income tax are the main ones. You'll pay 15.3% in self-employment tax plus federal and Arizona income tax on your net profit. Quarterly estimated payments are required to avoid penalties.
Read answerIs a bookkeeper cheaper than an accountant?
Yes, bookkeepers typically charge less than accountants for similar work. But they do different things, so the real question is which one you need for the tasks at hand.
Read answerWhat is a good profit margin for a construction business?
Most construction businesses should target 20-35% gross profit margin and 5-10% net profit margin. The actual numbers depend on whether you're a general contractor, specialty trade, or remodeler, and whether you're tracking job costs accurately enough to know your real margins.
Read answerWhat is catch up bookkeeping?
Catch up bookkeeping is the process of bringing your financial records current after falling behind. It involves entering transactions, reconciling accounts, and producing accurate financial statements for the months or years you missed.
Read answerWhy do contractors struggle with cash flow?
Construction cash flow problems happen because you buy materials and pay crews before customers pay you. The timing gap between spending money and collecting it creates constant cash pressure.
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