Academic journal article Journal of Small Business Management

Do Small Businesses Have High Failure Rates? Evidence from Australian Retailers

Academic journal article Journal of Small Business Management

Do Small Businesses Have High Failure Rates? Evidence from Australian Retailers

Article excerpt

Much has been written about small business and in particular about small business failure rates.(1) However, reliable statistics on small business failure are scarce and are often produced or inferred from databases designed for other purposes. As Cochran (1981, p.50) states, "Like the weather, small business failure is the subject of much discussion . . . But unlike the weather. . . there is . . . a dearth of timely, reliable, and relevant information on small business failure rates." The variety of definitions (or proxies) used further confuses the available information. As a result, and in the absence of any contrary evidence, dubious statistics suggesting very high failure rates for small enterprises are frequently quoted and have been allowed to form part of the folklore on this subject.(2)

At least part of the confusion over failure rates is the result of misinterpretations of available statistics. For example, Potts (1977, p.2) noted that "In 1973, 57 per cent of all failing concerns in the United States had been in operation five years or less." Potts follows this by saying (1977, p.9), "As has been discussed previously, more than half of all companies fail in the first five years of business." Clearly, the second sentence does not follow from the first. The first sentence is only commenting on the sub-set of business failures. It says nothing about the overall failure rate. The sub-set of business failures may be a very small proportion of the population of all businesses.

Scott and Lewis (1984, p.49) stated that "the absence of good statistical evidence leads to the growth of myths and half-truths." Without reliable information on the subject, these half-truths are permitted to continue unchallenged, and the "danger is that believers, acting in the faith, may take actions which have unintended consequences in the real world" (Scott 1982, p.239). Any policy decisions based on such myths would be suspect. For instance, the assumed high risk of small business failure is cited as justification for the high rates of return demanded by bankers and venture capitalists from this sector (Phillips and Kirchoff 1989).

This study seeks to clarify the apparent misconception that small businesses have a very high mortality rate. To clarify this misconception, the study was designed to provide some reliable statistical information on the rate of small business failure using a variety of definitions of failure found in the literature. It is hoped that this information will ensure that intending entrepreneurs will be more reliably informed about the risks involved. The results may also help to ensure that future policy decisions made by governments, financial institutions, and other groups with an interest in small business are more soundly based.

Defining Small Business

Over the years there have been many attempts at defining what constitutes a small business.(3) For example, "A Congressional committee in the USA was presented with 700 definitions of a small business'" (White, Bennett, and Shipsey 1982, p.3). Researchers and policy makers, looking for an objective definition of small business, have used a variety of criteria including: total worth; relative size within industry; number of employees; value of products; annual sales or receipts; and net worth (Cochran 1981). However, the benchmarks vary considerably. Cochran referred to a number of studies in the U.S. that used benchmarks ranging from 100 to 1,500 employees. Bannock and Doran (1980) reported that the definition of small business ranges from up to 50 employees in the Netherlands to 1,000 or more in the United States. Ganguly (1985, p.3) noted that

The search for a definition of a "small firm" goes back many years. In 1971, for instance; the report of the committee of inquiry on small firms under John Bolton systematically investigated various ways of defining a small firm. It did not take the committee long to realize that a small business could not be satisfactorily defined in terms of employment, turnover, output, or any other arbitrary single quantity. …

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