Why Businesses Fail (Based On IRS Statistics)
Everybody has an apocryphal number for expressing the rate of new business failures. Whether they claim 9 out of 10, or 1 in 5, failure statistics aren't going to help you succeed. What can help is knowing why so many businesses fail. We're talking strictly about sole proprietors here, and the majority of Schedule C filers are self employed sole proprietors with no employees. Rather than relying on surveys or anecdotes, I prefer to go the horse's mouth for statistics, in this case, the IRS. After spending a day studying their spreadsheets, I produced a table of statistics that self employed sole proprietors should find interesting.
A little over a quarter of the 23 million businesses filing tax returns as sole proprietorships in the U.S. lose money. Losing money in a particular tax year doesn't necessarily mean those businesses will ultimately fail, but it sure isn't a sign of health. So let's take a look at what the 73% of businesses making a profit did right, and what the 27% of businesses reporting a loss did wrong.
First, the businesses with a profit recorded almost twice as much in gross sales as the losers, 84% of all reported business income for the winners versus 16% for the losers. Lack of sales is the main killer of new businesses and old businesses alike. There's no tricky way around it, if you don't have any sales, you're just playing at business, and if you don't have enough sales to meet your overhead, you may as well be playing.
Next, the loss making businesses held almost twice as much inventory during the year as the successes. The average amount of inventory per sole proprietor is actually very low, just over $2000, reflecting a large number of services oriented businesses. And the statistics show that the profit making businesses are 60% more likely to create their own products by spending money on materials and labor. The depreciation deductions show that successful businessmen are much more careful with their business purchases, the losers spend 1.4 times as much on "stuff" as the winners.
The biggest difference between the failing businesses and the success stories is expressed by their debts. The business failures spent 250% as much on mortgage interest as the successes, two and a half times as much! It's not easy for sole proprietors to take mortgage interest deductions, the main exception I'm aware of is taking a portion of the home mortgage when declaring business use of the home. Is it possible that all of those people started a business thinking that a tax deduction would help them pay for their house? The situation with regular business debt was almost as bad, with money losing businesses spending a hair under twice as much on business loan interest as the sole proprietors who are making a profit. And failing businesses were nearly eight times as likely to be carrying over excess casualty depreciation on their home office deductions (form 8829), which sounds suspiciously like an attempt throw in the kitchen sink before throwing in the towel.
The final significant difference was in the category of "other business deductions", those deductions that don't fit nicely into any of the IRS categories and account over 10% of sole proprietor expenses. Here again, the failing businesses spent around 50% more on stuff than the sole proprietors earning a living.
To summarize, successful sole proprietors spend money creating products and focus on generating sales. Everything else is commentary.
A little over a quarter of the 23 million businesses filing tax returns as sole proprietorships in the U.S. lose money. Losing money in a particular tax year doesn't necessarily mean those businesses will ultimately fail, but it sure isn't a sign of health. So let's take a look at what the 73% of businesses making a profit did right, and what the 27% of businesses reporting a loss did wrong.
First, the businesses with a profit recorded almost twice as much in gross sales as the losers, 84% of all reported business income for the winners versus 16% for the losers. Lack of sales is the main killer of new businesses and old businesses alike. There's no tricky way around it, if you don't have any sales, you're just playing at business, and if you don't have enough sales to meet your overhead, you may as well be playing.
Next, the loss making businesses held almost twice as much inventory during the year as the successes. The average amount of inventory per sole proprietor is actually very low, just over $2000, reflecting a large number of services oriented businesses. And the statistics show that the profit making businesses are 60% more likely to create their own products by spending money on materials and labor. The depreciation deductions show that successful businessmen are much more careful with their business purchases, the losers spend 1.4 times as much on "stuff" as the winners.
The biggest difference between the failing businesses and the success stories is expressed by their debts. The business failures spent 250% as much on mortgage interest as the successes, two and a half times as much! It's not easy for sole proprietors to take mortgage interest deductions, the main exception I'm aware of is taking a portion of the home mortgage when declaring business use of the home. Is it possible that all of those people started a business thinking that a tax deduction would help them pay for their house? The situation with regular business debt was almost as bad, with money losing businesses spending a hair under twice as much on business loan interest as the sole proprietors who are making a profit. And failing businesses were nearly eight times as likely to be carrying over excess casualty depreciation on their home office deductions (form 8829), which sounds suspiciously like an attempt throw in the kitchen sink before throwing in the towel.
The final significant difference was in the category of "other business deductions", those deductions that don't fit nicely into any of the IRS categories and account over 10% of sole proprietor expenses. Here again, the failing businesses spent around 50% more on stuff than the sole proprietors earning a living.
To summarize, successful sole proprietors spend money creating products and focus on generating sales. Everything else is commentary.
posted by Morris Rosenthal at
12:44 PM
1 Comments:
Just saw this item now. Good summary, it will help me with concentrating on sales even more (I don't by much stuff anyway, so this does not worry me...)
Thanks Morris and Succoth Sameah!
Amir
Post a Comment
Links to this post:
Create a Link
<< Home