There are lots of statistics out there about the survival rates of businesses.
According to the Small Business Administration’s Office of Advocacy 2018 Frequently Asked Questions, about 50% of businesses survive five years.
I wonder why it is so widely publicized that businesses’ failure rate is 50%.
Why don’t we talk about the cup being half full?
Why don’t we talk about the 50% of businesses that succeed?
To me, it feels like we publicize the failure rate of business in a way to discourage entrepreneurship.
Many successful business owners don’t succeed on their first business.
However, they learn from their failures and then move on to be successful in future businesses.
If you think about it building a business that continues to operate after five years is a huge accomplishment.
It means the business owner had become proficient and selling their services and products to customers that happily trade their money for those services and products.
It means the business owners are providing something of value that provides solutions for their customers.
Creating a successful business is something to be applauded.
Often the business owners must become adept at adapting to a changing environment that requires the humility to innovate for the benefit of their customers.
Why don’t we talk about the failure rates of employees?
Why don’t we talk about how many people live lives of desperation in jobs they hate because they need the money?
How many people have been fired from their jobs at one time or another?
Why don’t we have statistics on employee failure rates that appear to disparage the world of being employed by someone else?
People often start working as employees for companies and then learn that they are not a good fit for that company.
Or those same people get a better job offer from another company.
Or they realize they don’t like their current career, so they move into a different profession.
Many people now will have eight or more different jobs during their careers.
Is it a failure that these people don’t work for the same company for their 40-year career?
NOOOO!!!!!!! Is the answer I come back with.
My point in bringing this all up is just because a business fails in the first five years doesn’t mean the sky is falling, and the world will end.
It might feel like the world is going to end while the business is failing.
However, most things in life are temporary, and failure is one of those things that is temporary.
Failure is the friend that nobody wants, but everybody needs.
Often our biggest failures lead to our biggest successes.
Why then do businesses fail?
While there are lots of reasons why businesses don’t succeed, I think the predominant reason is the business owner isn’t getting paid enough for their effort.
If the business owners were earning enough, they would continue plodding away with their business.
Most humans like consistency in their life.
Business owners are humans, and I propose that if they were making enough in their businesses, they wouldn’t leave those businesses.
If one has a cash cow, why would they choose to forsake the cow for an anemic new business opportunity?
I was speaking with a woman yesterday named Jane, and she has had a business for eight years now.
She is one of those successful people that made it past the “dreadful failure” milestone of business ownership.
As I was talking with Jane, she told me she has no idea how much money she makes.
While this may seem strange, this is a comment I hear regularly.
People that work as employees for companies never have this confusion about how much they get paid.
They know because they get a regular paycheck.
They get a W-2 each year.
They are on a salary and are constantly reminded what their worth is to the company that pays them.
For most business owners, their compensation is not so simple.
Business owners typically get paid in numerous ways, such as:
- Health insurance
- Company Retirement Contributions
- Owner distributions
- Company-provided vehicles
- Family members paid by the company
- Personal expenses paid by the company
When there are multiple ways a person gets paid, it can become challenging to calculate accurately how much a business owner gets paid.
Often business owners deflate their salary to reduce their tax bill.
While this tactic is logical, it causes some problems such as:
- Inadequate regular tax payments (This is why so many business owners get tax surprises)
- Overinflation of business profits
Additionally, the IRS frowns on unreasonably low owner salary.
The best solution is to give the business owner a salary that is commensurate with the work the owner does.
If business owners want to hire replacements to themselves, the business will have to have a compensation package that is competitive to attract the right company.
If it would cost $200,000 to hire a competent replacement of the business owner, then the business owner should receive a $200,000 salary.
By paying the business owner a reasonable salary for the work they provide to the business, everything becomes simpler and clearer.
Now the business owner has the same clarity on their compensation as most employees.
What if the business isn’t making enough money to pay the business owner a reasonable salary?
Then that means changes need to be made in the business.
Either the business is not bringing in enough revenue, or the business is spending too much money.
If the business is not bringing in enough revenue, then the business needs to adjust its sales and marketing activities until the business is bringing in enough revenue.
If the business is spending too much money, then decisions need to be made on which spending to keep and which spending to remove.
Some of the expenses that need to be removed are difficult decisions to make.
It could be that the business has too many employees for its current revenue.
Then employment arrangements have to be adjusted.
This would result in either firings or reduction in available work hours for some of the employees.
While this can be difficult, it should be remembered that the business owner’s compensation must come first before all other employees.
The business owner provides the most value to the company and must be paid more than any other employee.
If a business does not make business owner compensation the number one priority, the chances of business failure increase dramatically.