2.4 Ten-year survival statistics for UK businesses

What follows is one of the most important and revealing sections of the entire site. Make sure you read it.

 Department of Trade and Industry/VAT statistics show that just under 70% (68.9%) of VAT-registered businesses cease to trade within ten years of registering for VAT.

Because these statistics are based on the legal requirement to register for VAT, and are based on all UK businesses rather than just a survey sample, they are likely to be highly reliable.

However what these figures do not include is the failure rates amongst the majority of start-up businesses. This is because businesses are not required to register for VAT until their sales reach a threshold. This threshold changes annually but is currently (2008) £67,000.

Anecdotal evidence suggests that failure amongst these embryonic businesses below the VAT threshold is particularly high. That is only to be expected, because many start-up ideas are relatively untested, and most start-ups are by definition run by people with little or no business experience.

Presumably therefore it is failure amongst these smallest of businesses that brings the five-year failure rate up from the 48% amongst VAT-registered businesses to the 80% often quoted by lenders, researchers and the business community in general.

I remember hearing Evan Davis, the BBC economics editor, citing that an incredible 70% of start-ups fail within just three years. I do not know what his information source was, but given his standing I believe that statistic to be highly credible.

It is therefore clear that when you take account of the unquantified failure rate amongst the smallest businesses which never even reach the VAT threshold, the percentage of businesses not surviving for ten years will be significantly greater than the 70% revealed by the VAT statistics – quite probably as high as 90%, and possibly significantly more.

In light of the above statistics it seems no exaggeration at all to claim that only around 10% of all businesses that are ever started survive for more than ten years.

Even if you choose to disregard the fate of the smallest businesses and new start-ups, on the grounds that there are no hard statistics about these, the figures still show that 70% of those businesses that do make it to VAT-registration do not reach their tenth birthday.

But let’s see how the VAT statistics look on a graph, because it is much easier to actually see it.

 VAT Survival Graph 1

This graph shows the number of businesses surviving out of every hundred that register for VAT. As you can see, by year ten just 32% are left – which means that two-thirds have disappeared.

These same VAT figures can be plotted in another way, and this is really revealing, because it shows up something most unexpected. You might be forgiven for expecting that once a business had made it through the first few treacherous years it would be comparatively safe. It seems logical to assume that after the ‘no-goers’ were weeded out, and as the owners of the surviving businesses gained in experience, a far greater proportion of those that had survived would go on to thrive. After all, if you’ve been in business for two or three or five years you must have learnt a lot, and know what you’re doing, wouldn’t you think? You’d think you’d at least be able to keep going even if you didn’t set the world alight, wouldn’t you? I would. But surprisingly that is not the case.

So what do the statistics show?

Let’s see them on another graph.

 Survival rates VAT, 2nd

This graph displays the proportion of businesses of each age which fail. This graph shows that an almost constant 5% of surviving businesses fail with every six months that pass. For example, it shows that round about 6% of three-year-old business will fail in their next 6 months, and similarly that about 5% of eight-year-old business will fail within their next six months.

It certainly does not show the expected pattern of a high failure rate in the early years, falling away to a much lower failure rate amongst older businesses with more experience under their belt.

This means that the chance of a business failing after even nine or ten years is nearly as great as one that has been established for just a few years.

This is revealing and significant and I find it quite shocking, because it says that in by far the majority of cases the experience of the business owner counts for almost nothing. When it comes to sustaining their business in the longer term not only are they not learning how to grow and prosper, they are not even learning how to survive. They are almost as likely to fail in year ten as in year two.

Let’s ‘magnify’ the graph and take a closer look so we can see in more detail what is happening.

 Survival rates VAT, 3

This final graph shows the same data as that above, but it exaggerates the steepness of the slope by focussing on just the bottom part of the graph above. All this does is make it easier for us to see the detail and so to read.

This graph shows us that although the failure rate seems to be constant at around 5%, it does actually decrease slightly amongst older businesses. Older businesses are slightly better able to survive than younger businesses. For example, the failure rate amongst five-year-old businesses is just over 5% every six months, the failure rate amongst ten-year-old businesses is almost exactly 4%. This means that between years five and ten, business owners have improved their survival rates by just 1%.

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Anyone running a business needs to have their eyes open to the facts that just coasting along in business is not enough… even to survive, let alone to build a sustainable healthy business and an enriched lifestyle. The above facts prove that approaching business as the masses do is just not good enough.

While this revelation can be daunting it is also necessary, because it is the catalyst for upping your game. Your next step is to discover how to ‘up your game’.

Learning how to use your finances as an indispensible and powerful tool to plan, manage and grow your business is one of the three keys to upping your game. And this site will show you exactly how to use your finances in this way – even if you are a complete novice.

Don’t deprive your friends and co-workers of this truly critical knowledge. They need it too. Do them a huge favour by emailing this article to them.

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