What Are the Most Important Business Facts an Entrepreneur Should Know?
There are stories of successful businesses starting based on an entrepreneur’s hunch or a mere chance that they took. While these success stories do indeed happen, and can be inspiring, in general aspiring business owners should rely on data and facts to run a company in the modern age. Statistics on small businesses can offer insight on various topics, such as surviving the difficult first year in business, managing a labor shortage, and maintaining cash flow. By relying on hard facts, an entrepreneur may enter the business world with open and eyes and controlled expectations. This balanced, measured outlook is more likely to result in sustainable success.
That said, it can be difficult to identify the most reliable and important facts amidst all the noise and nonsense on the internet. A quick Google can bring up seemingly legitimate business facts, but some of these sources may not provide accurate, up-to-date information.
This article will provide aspiring business owners with the latest facts and trends related to running small businesses in the United States. Specifically, we will review ten important facts that every entrepreneur should know.
1. The Majority of Small Businesses Survive Their First Year in Business, But Not Through Their Fifth Year
The harsh reality is that it is difficult for small businesses to survive long-term. Most owners of small to medium-sized businesses therefore have legitimate concerns about making their company stable enough to survive over many years.
As of 2017, almost 80% of small businesses created that year survived to see 2018. However, from 2008 to 2018, only 50% of businesses survived to see their fifth year.
For this reason, it is important for small business owners to plan for the long-term. While it is tempting to focus on surviving in the short-term, certain practices can risk the health of the company long-term. For instance, it might not be wise to pour all of one’s resources into a venture in the first few months. Without the proper planning and caution, a business may burn bright in the beginning, then fade away as money and resources run out.
Example: Lois is thrilled to start her new software company in Los Angeles. Eager to get into business, she spends a lot of money on expensive computers and office rent. However, she does not plan for inefficiencies, and when her business runs into problems with vendors and suppliers, she is forced to take out loans. Unfortunately, the business struggles to produce popular products, and Lois cannot pay back these loans. Because she did not take the time to plan long-term and come up with a business plan, Lois’ business does not survive even two years. She should have tested out her product first to ensure that it had buyers. She should also have bought cheaper computers and office space at the beginning to ensure she had enough money for other purposes or potential inefficiencies.
2. The Majority of Family Businesses Are Not Passed Down Successfully
In the United States, approximately 40% of family businesses last through a second generation. However, this number drops down to a meager 13% when it comes to passing the business onto a third generation. Only 3% of family-owned businesses survive into a fourth generation or beyond.
As these statistics show, the odds of passing down a family business over multiple generations are not great. To overcome these poor odds, a business owner should engage in careful planning and take early action. He or she should talk with potential heirs to the business and begin putting in place the necessary legal mechanisms.
Example: Butch is the owner of a popular deli that sells pastrami sandwiches and homemade pickles. While Butch trusts that his community loves the deli and would like to see it become a fixture, he worries that it will not survive to see a second generation. He has seen other popular businesses come and go due to poor management and lack of cash. To prevent this from happening to his deli, he sits down with his son, Butch Jr. He asks his son about his commitment to running the deli, and Butch Jr. assures his father that he aspires to manage the business and keep it going for another generation. Reassured, Butch contacts a lawyer about setting up the inheritance and making financial and managerial preparations to help his son in the future.
3. Almost 40% of Small Businesses Are Currently Experiencing Supplier Delays
During times of recession, international crisis, or labor shortages, businesses can suffer from supplier delays. In additions to problems with supply chains, entrepreneurs also have to worry about an increase in the cost of commodities. It is important that small business owners stay focused on changes in commodity prices. These owners should think ahead and be prepared to adapt so they are not caught off guard by economic crises beyond their control.
Example: Katelina is the proud owner of a local coffee shop. Unfortunately, her industry has been experiencing supply chain disruptions. This means that Katelina is having trouble sourcing her coffee beans. Without coffee beans, Katelina cannot make her delicious coffee, and as a result, she loses significant revenue. Katelina wonders how her business will survive without regular shipments of coffee beans. In an effort to adapt, Katelina decides to embrace the change and market her pastries and non-caffeinated drinks. While she does not earn the same profit as she did prior to the supply chain crisis, she manages to keep her business alive until the problem resolves.
4. Small Businesses Have Borne the Brunt of Recent Job Loss
Over the past two years, private employment has dropped by more than 15%. While companies with over a thousand employees witnessed a 13.6% drop, companies with between 20 to 49 employees experienced a decline of 21.5%.
It is important that small business owners use these statistics to educate local politicians about the current employment crisis.
Example: For the past five years, Chris has been the owner of a grocery market. In his first few years of running the store, he employed 20 people. However, recent economic issues have meant that he can no longer afford to keep that many employees. Now, he only has enough money to support ten full-time staff members. The result is that the store runs slower, and he cannot afford to give raises to the employees who have been giving their all. In order to help solve this problem, Chris attends town meetings to inform local politicians about his struggles. He hopes they will work toward solutions that will help other struggling small business owners retain employees.
5. Most Entrepreneurs Use Personal Savings or Loans to Cover Startup Costs
Starting a small business can often be expensive. Three of the most common sources of capital used to fund startups include the following:
- An entrepreneur’s personal or family savings – 64%
- Business loans from banks or other financial institutions – 17%
- Personal credit cards – 9%
Only half a percent of entrepreneurs use venture capital as a way of funding their startups. An aspiring small business owner should therefore be realistic about gathering startup funds. However brilliant one’s idea, it is highly unlikely an investor will offer the funding required. If an entrepreneur does not have personal savings from which to draw money, then loans or credit cards would be the best option.
Example: Shaun is interested in starting a computer graphics company that would make top-quality CGI for film studios. While Shaun brings experience in this industry, he is having a hard time attracting investors who are willing to part with their money to fund an unproven startup. As a result, Shaun must turn to his personal savings. Because he only has a quarter of what he needs for his startup costs, he asks his family for financial help. They are able to offer another quarter of what he needs. For the rest, Shaun applies for a bank loan.
6. Most High-Tech Workers Are Employed by Big Companies
Almost 65% of high-tech workers are employed by large companies made up of over 500 employees. A large firm has the economic scale to support high salaries, meaning that small businesses will have a difficult time competing with bigger companies’ compensation abilities.
This means that entrepreneurs must figure out how to compete for highly skilled workers using means other than salary. Perhaps a small business offers a positive company culture. This might include giving Fridays off, allowing employees to bring their pet to work, or offering gym memberships. These kinds of benefits can be just as attractive to skilled employees as high salaries.
Example: Jonas is the owner of a robotics startup based in Los Angeles. Due to the high number of tech jobs in the city with greater funding, Jonas cannot afford to compete with other business’ high employee salaries. In order to attract skilled tech employees, Jonas decides to offer unique lifestyle benefits. He lets his employees work from home three days of the week, lets them bring their dogs to work, and offers discounts to local restaurants and gyms. Even though Jonas is unable to match the high salaries of other companies, his employees enjoy the benefits he offers and feel they are indeed worth something.
7. Sixty Percent of Small Businesses Have a Hard Time with Cash Flow for Various Reasons
One of the major challenges a small business faces is maintaining steady cash flow. The main reasons why a small business might suffer from a cash flow shortage include the following:
- Decreasing margins or sales
- Not getting paid according to an agreement’s terms
- Lack of cash reserves
- Seasonal demand changes
- Outstanding receivables
Cash flow issues can present a particularly dangerous problem because they can cause a company to become insolvent. A business owner can anticipate a cash flow issue by managing a simple budget and following it closely. By following a budget, a business owner will have time to respond to a cash flow issue by pursuing financing or by limiting spending.
Example: Sherry is the owner of a store that sells swimsuits. During the summer season, Sherry is flush with cash due to the high demand for swimwear. However, during the winter season, Sherry’s business has a harder time due to the weather and lack of swimming. Her business survives only thanks to the cruise ship crowd, who buy swimwear for Christmas vacations. To ensure that she does not suffer cash flow issues, Sherry follows a strict budget, only buying what she needs. If fewer people go on a cruise that year, she takes out a loan if necessary.
8. Business Ownership is a Major Source of Family Wealth
Business equity for non-Hispanic White families makes up about one of every three dollars’ worth of nonfinancial assets. By contrast, business equity for Hispanic and Black families makes up about one out of every eight dollars if nonfinancial assets.
Because of the significant difference between these groups, entrepreneurs should be sure to advocate for more people of color to receive ownership opportunities.
9. Veterans Are the Perfect Candidates for Small Business Ownership
While veterans make up only seven percent of the adult population of the United States, their businesses represent about six percent of all businesses. In total, these businesses bring in an extraordinary $950 billion, employing almost 4 million employees with $178 billion in payroll per year.
These statistics show that veterans can find a great potential career within the business world. After returning from service, it can be difficult for veterans to reintegrate into society, so it is important for entrepreneurs to advocate for veterans to receive ownership opportunities.
10. Knowledge and Service Businesses Are Most Likely to Be Based at Home
Some types of small businesses are more likely to be run from an entrepreneur’s home than others. The primary business industries that fall into this category include the following:
- Information (70%)
- Professional, technical, and scientific services (65%)
If an individual is considering beginning a home-based small business, then they should take a look at these specific industries.
There is a lot of information on small businesses on the internet. By paying attention to legitimate sources of data and facts, an entrepreneur can become aware of business trends and stay up to date. This, in turn, can help a small business owner improve his or her operations and make their business a success.