To succeed, you have to know what failure looks like. I recently reviewed the data of 27 years of US Manufacturing companies’ failure rates. The data tells a story. 80% of US manufacturing companies have failed within 25 years of starting up. Let’s dig a bit deeper.
“50 % of businesses fail within the first 5 years. That is a ubiquitous fact tossed around by budding entrepreneurs discussing their business struggles with their friends and family members. As a business owner, after you have made it through the first five years, you take a deep breath and think – “Phew, dodged that bullet. Now we are home free.” Wrong!
A fact that is not as widely publicized and hence less spoken about is that the option of failure continues beyond the first five-year period. It continues even beyond the first 10-year period. The US Bureau of Labor Statistics data shows that about another 30% of companies fail between year five and year fifteen. And, only about 20% of companies make it into their 25th year of existence.
This trend holds for all businesses, including manufacturing companies. The graph below shows US manufacturing companies’ survival rate by the number of years from startup1.
Another stark fact the data reveals is that the preponderance of companies that fail are small.
There are no surprises there.
The smaller companies lack the financial fortitude (i.e., access to business loans or investment) to sustain their longevity.
Percentages only give you one dimension of the picture. Let us look at what the percent figures mean in terms of actual numbers. Every year tens of thousands of manufacturing companies startup with great promise, gusto, grand ambitions, and visions. Twenty years later, less than 25% of them are still around. Between 10,000 to 20,000 manufacturing companies fail each year. This is the harsh reality.
The number of manufacturing companies started every year is shown in the graphic below.
All this prophecy of doom-and-gloom is depressing. This story has a huge bright side. Success is possible. About 20% of companies survive. They have figured out what it takes to thrive, despite economic downturns, overseas competition (and possibly a pandemic, which only time will tell). These companies have figured out what it takes to break free of the roulette wheel of statistical certitude.
Innumerable sources discuss and review the causes of business failure. Entrepreneurs are continually seeking answers to find out the magic formula, seeking answers to why businesses fail. Naturally, the market of information about how not to end up in failure is replete with bucketfuls of advice on what to do to stay ahead of the death spiral that consumes most businesses. Google the phrase “business failure,” and you will see two million-plus examples of what I mean.
If you review enough of those 2 million suggestions, your mind will be swimming with scores, if not hundreds of causes. External factors versus internal factors, leadership or lack thereof, marketing kerfuffles, owner egos, lavish lifestyles, over expenditure, over-leveraged with debt, complex operating processes, and on and on, the list is endless.
If you look for a common underlying theme in all these reasons, it will translate to one simple fact – a company fails because it runs out of cash. The single overarching cause for the failure of manufacturing companies is – running out of money. Simple, obvious, and common-sensical enough that you may be thinking – “that is a no-brainer. What we need to know is why?”
The answer to the “Why?” question is also very fundamental – not enough sales! Yes – sales, not enough of it. Not a lack of profit, but lack of sales. A drop in sales over a few periods is the first significant sign of a company’s financial deterioration. If sales are maintained at healthy levels and increased, quarter after quarter, year after year, then a company stays in business.
Sales are what keeps the proverbial boat afloat. Sales are what keeps you from hitting all the rocks and hazards of the icebergs of hidden costs, wastes, inefficiencies, debt, and so on. What is required is a laser-like focus on getting new business, sustaining that level of business, and increasing the level steadfastly until you become a dominant player in your realm of expertise. That is what keeps the lights on, keeps the bills paid, and keeps customers coming back over and over again. That is the answer to successfully staying in business well past the 25-year mark, the 50-year mark, and yes, even the 100-year mark.
Find new customers; keep them happy. No – keep them delighted! Do everything to minimize friction at all points in your business process workflows that deal with the customer. Eliminate friction in customer transactions. Eliminate friction in the customer experience. Eliminate friction in customer user experience.
All systems should be aligned to support and smoothing the processes that deal with a company’s one prime task – keep generating and sustaining revenue.
(Sorry Mike Michalowicz, love your book, but it is NOT Profit First)2
- This data is through the year ending March 2020. That is the month when the pandemic started roiling the US economy with shut-downs and work-from-home (WFH) initiatives. Manufacturing is unfortunately not a WFH industry, at least the machinery and equipment part. Therefore, everything in this data is pre-pandemic. The year ending March 2021 data will be an aberration with a possible steep failure rate for first-year companies. The number of manufacturing companies started in 2020 will also most likely drop. Whatever the post-pandemic data shows, the inherent trends reflected over several decades will not go away. The pandemic only superimposes an additional dimension of challenges that will have a compound effect on the historical data trends.
- Mike Michalowicz did acknowledge in a subsequent book, “Fix This Next”, that focusing on profit first above all else was inadvertent.