Business failure is defined as the closing of a business that results in financial loss for at least one of the business's creditors. An associated term, business dissolution, refers to the formal termination or closure of a business as well, but with dissolution, financial loss (for the business owners or for the business's creditors) is not necessarily a part of the equation.

All entrepreneurs who decide to establish their own business face the possibility of failure, and a good deal of "popular wisdom" holds that failure is not only possible but probable for the small business owner seeking to launch his or her own enterprise (it has long been said that four out of five new businesses fail within five years of their establishment, for instance). But current studies indicate that such gloomy forecasts often present a false picture of entrepreneurial realities. Indeed, many business experts that the majority of small business owners are actually successful with their ventures. "Outright failures of small businesses are in fact remarkably rare," contended Nation's Business, "if failure is defined, reasonably enough, as a business closing that results in losses to creditors because the firm files for bankruptcy or because it simply closes its doors without paying its debts."

Business experts who study the gap between actual rates of business failure and the popular perception of those rates often blame it on a general misunderstanding of the nature of business dissolutions. "The confusion comes in mixing up business failures with business dissolutions," Nation's Business flatly stated. "Lots of small companies go out of business for reasons that probably shouldn't be called 'failure'—the owner may have gotten bored, for instance, may be disappointed with the returns, or may simply want to try a greener pasture. If an entrepreneur closes one business and starts another one that is more successful, that's more reason for celebration than concern." Bruce D. Phillips, a director with the Small Business Administration's office of economic research, even told Nation's Business that studies indicate that there may be four to eight times as many dissolutions as there are outright business failures.


Nonetheless, thousands of small business ventures do fail every year in America. "Companies stumble for many reasons," observed Clyton Christensen in Across the Board, "among them bureaucracy, arrogance, tired executive blood, poor planning, short-term investment horizons, inadequate skills and resources, and just plain bad luck." These factors—as well as myriad others—can have a debilitating impact on an operation, as many small business surveys will attest. Chief reasons for business failure cited within such surveys include the following:

POOR PLANNING Ultimately, many small businesses fail because of fundamental shortcomings in their business planning. Planning begins with finding the right business and is integral to every aspect of business operations, including selecting a site, deciding on financing, anticipating work force needs, budgeting, and managing company growth. Planning that is grounded in realistic expectations and accurate, current information is an invaluable asset. Conversely, planning that is based on hopes and hearsay can cripple or destroy even a good business idea in fairly short order.

POORLY CONCEIVED EXPANSION "Every business owner wants to grow his or her business, but expanding with no infrastructure in place makes a business ripe for failure," wrote Tonia Shakespeare in Black Enterprise. "You can incur tremendous losses when you expand outside your core market. Not only is the physical aspect of expansion costly but there are different buying habits in different geographical locations. If you venture into an area outside your home turf, you had better prepare by doing a lot of research."

CASH FLOW DIFFICULTIES Poor cash flow kills thousands of small businesses every year. "Most business owners don't realize how much money it takes to run a business," wrote Shakespeare. "Understand what it takes to get a revolving line of credit before you start your business. It's always easier to get money when you don't need it, so don't wait until you're desperate. Develop your business plan using conservative projections and don't be overly optimistic." Shakespeare warned that profitable, fast-growing businesses can also run into cash crunches that can ultimately lead to bankruptcy. "That's why ongoing cash-flow analysis—tracking the money coming in and going out of the business—is a must."

INABILITY TO REIN IN FLAWED BUSINESS STRATEGIES Some business owners simply refuse to admit when they are wrong. Many small businesses can recover from ill-conceived business initiatives if they are recognized and halted before too much damage is done. But all too often, business owners and managers stubbornly stick with strategies that are doomed to failure, rationalizing that the initiative will begin paying off next month or next quarter. And before they know it, their business is gone, dragged down by poor planning and inordinate pride. Writing in Management Today, Robert Heller characterized this tendency thusly: "Top management sets its sights on some grand but imperfectly conceived objective, launches an incompetent plan of action, pours in cash rather than control when the action misfires, and ignores all the adverse evidence until the disaster strikes."

DETERIORATION IN CUSTOMER BASE This can happen for any number of reasons, including poor service, high prices, and new competitors. Making improvements in products/services offered, marketing, inventory, customer service, and work force personnel can all do a great deal to halt deterioration in customer relations.

INATTENTION TO WARNING SIGNS Most small business failures do not come out of the blue. Certainly, business failures that result from catastrophic natural disasters or the sudden death of a key business member can not be anticipated, but most businesses expire as a result of more mundane factors. New customer complaints and surges in returns are often early warning signs of operational problems. Basic financial tools such as balance sheets and financial statements, meanwhile, can be very helpful tools in helping business owners diagnose what is ailing their company. The numbers contained in those documents often provide ample warning of poor cash-flow management, inventory problems, excessive debt, undercapitalization, or untrustworthy customers, but the business owner has to take the time to look (or take the time to hire an accountant to look) or the warning signs may go unheeded until it is too late.

Other reasons often given for small business failures include the following:

Inattentive and/or indecisive management

* Micromanagement
* Poor control of production costs
* Poor control of product or service quality
* Underpricing of goods or services sold
* Inadequate staff training
* Loss of key employees or business partners, either to extended absence or another company
* Unhealthy company culture
* Overreliance on one customer
* Overinvestment in new technologies of untested value
* Inadequate financing
* Inadequate insurance
* Inadequate tax planning
* Failure to promote and maintain a good public image in the community and/or marketplace
* Poor control of inventory
* Poor relationships with suppliers/vendors
* Poor/unmotivated employees
* Inadequate or subpar professional assistance
* (accountants, attorneys, etc.)
* Competition
* Failure to anticipate marketplace trends and developments
* Undue emphasis on products or services of limited popularity
* Poor budgeting decisions
* Extending too much credit
* Inattention to financial indications of company health
* Flawed or discarded business plan
* Excessive reliance on credit


Bankruptcy is a legal proceeding, guided by federal law, designed to address situations wherein a debtor—either an individual or a business—has accumulated debts so great that the individual or business is unable to pay them off. It is designed to distribute those assets held by the debtor as equitably as possible among creditors. Bankruptcy proceedings may be initiated either by the debtor—a voluntary process—or by creditors—an involuntary process.

Chapter 7 Bankruptcy. Individuals are allowed to file for bankruptcy under either Chapter 7 or Chapter 13 law. Under Chapter 7 bankruptcy law, all of the debtor's assets—including any unincorporated businesses that he or she owns—are totally liquidated, and the assets are divided by a bankruptcy court among the individual's creditors.

Chapter 13 Bankruptcy. This is a less severe bankruptcy option for individuals. Under the laws of Chapter 13 bankruptcy, debtors turn over their finances to the court, which distributes funds and payment plans at its discretion.

Chapter 11 Bankruptcy. Chapter 11 bankruptcy law is designed to provide businesses with the opportunity to restructure their finances and debt obligations so that they can continue to operate. Companies usually turn to Chapter 11 protection after they are no longer able to pay their creditors, but in some instances, businesses have been known to act proactively in anticipation of future liabilities.


Business failure is usually a demoralizing event in a person's life because it impacts both professional and personal self-esteem. Indeed, many experts believe that the entrepreneur who experiences a business failure goes through many of the same stages as individuals who suffer from the loss of a friend or loved one—shock, denial, anger, depression, and acceptance. But observers are quick to point out that people who experience business failure can still go on to lead rewarding professional lives, either as part of another company or—down the line—in another entrepreneurial venture.

Many analysts believe that chances of subsequent success in the business world often hinge on the entrepreneur's activities in the first year or two after the failure has occurred. "[After a business failure,] you need a period of decompression to rethink and recharge," one executive told Entrepreneur. "People are too quick to rush into the next thing just to prove they can do it." Instead, victims of business failure are often urged to take the time to honestly examine the reasons for the failure, even as they return to the work world in their old capacity as employee. Was your marketing plan flawed? Did you underestimate the amount of time it would take to become profitable? Did your manufacturing processes compromise product quality? Was your family fully committed to supporting the endeavor? Did you pay enough attention to work force training issues? Small business consultants strongly encourage entrepreneurs to seek out the opinion of others—industry experts, area businesspeople, loan officers, investors, family members, etc.—when taking on this task, for their perspectives can be invaluable in helping you to establish a successful business on your next attempt.


Overtime is work done by hourly employees beyond the regular work hours per week. Any work over forty hours per week for an hourly worker is considered overtime. Overtime and overtime compensation are provided under the federal Fair Labor Standards Act of 1938. It is required under the FLSA that employers pay employees working more that forty hours per week time-and-a-half, or 150 percent of the worker's salary for those hours exceeding the weekly average.


U.S. labor law distinguishes between "exempt" and "non-exempt" employees regarding overtime. Exempt employees do not have to be paid overtime if they work more than 40 hours a week. According to the FLSA, members of this class of employee include workers "employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools) or in the capacity of outside [salesperson]." Any worker employed in the above categories who meets Department of Labor salary and duty tests is exempt from receiving overtime pay regardless of the number of hours they work.

In some businesses, employees attend to a wide variety of tasks that may include a blend of "exempt" and "non-exempt" duties. In these instances, their overtime status is dictated by their "primary duty" to their employer. Time spent on each task is an important but not decisive factor in determining exemption status. Instead, federal regulations dictate that the most relevant factor is "the relative importance of the [exempt] duties as compared with other types of duties …and the relationship between [the employee's] salary and the wages paid other employees for the kind of nonexempt work performed." For instance, the Code of Federal Regulations notes that "in some departments, or subdivisions of an establishment, an employee has broad responsibilities similar to those of the owner or manager of the establishment, but generally spends more than 50 percent of his time in production or sales work. While engaged in such work he supervises other employees, directs the work of warehouse and deliverymen, approves advertising, orders merchandise, handles customer complaints, authorizes payment of bills, or performs other management duties as the day-to-day operations require. He will be considered to have management as his primary duty." The Code of Federal Regulations also includes tests that can be used to determine the primary duties of other "white-collar" workers, including executives, professionals, computer programmers, and administrative personnel.

Employers should regularly review their staff classifications to make certain that all workers in their employ are properly classified. "As part of that process," wrote Jeffrey Pollack in CPA Journal, "employers should develop written job descriptions that delineate the duties of each position; the employee's actual duties—not the job description—will be the controlling factor."


Businesses with seasonal peaks, with quotas and deadlines, or with the possibility of rush orders, will at some point probably not be able to meet staffing needs with the regular hours worked by employees. It is at these crisis points that overtime becomes an invaluable tool for the employer.

Most business experts, however, counsel owners and managers to use overtime sparingly if possible. The ideal use of overtime is when employees are willing to work longer hours for increased pay, and the employer needs qualified, trained individuals who will not need excessive supervision while tackling an increased work load. An employer should not, however, rely on employees working many more hours per week to routinely make up for work not accomplished during the regular work week. If this is the case—if overtime becomes essential to the performance of a business, even during regular operating scenarios—there may be other factors, such as poor compensation, morale, or inadequate staffing levels, to be considered.

One serious consideration often cited in the routine use of overtime is the effect it can have on employees' regular production. Increased work hours during one period may lead to increased absenteeism during others, due to family commitments that were put off during "crunch" periods or to illness exacerbated by stress. Indeed, Cornell University's School of Industrial and Labor Relations conducted a late 1990s study that found that employees who work at least 11 and up to 20 hours over overtime weekly showed a much greater incidence of severe conflicts in the work-family realm. These conflicts manifested themselves in higher levels of stress, alcohol and drug use, and absenteeism. In addition, some analysts believe that employee productivity during regular business hours often undergoes a major downturn after periods of extensive overtime.

All overtime should be authorized by a manager or supervisor, preferably in writing. Consideration should be given to tracking the work accomplished during overtime hours; this ensures that employees are continuing to be productive at the increased pay rate, even with the stress of longer hours and increased sales or other pressures. Tracking what work is done on overtime will also aid the owner or manager of a business to better plan for staffing needs in the future.


Because overtime can become very expensive, and can sometimes be draining for regular employees, some businesses have embraced alternate plans of human resource management.

Expanding workforce size. The first determination to be made is whether the amount of overtime used throughout the year is enough to justify the hiring of additional staff. This step should be very carefully considered, however, because while overtime is expensive, so are the costs (salary, payroll taxes, social security, benefits) associated with hiring additional employees.

Temps. Another alternative to overtime is to utilize temporary workers. This can be done independently by the owner or manager, or through a temporary employment agency. Depending on the task (and how much training and supervision is required), the temporary employee can save businesses significant overtime expenses. This alternative can be particularly attractive if increased staffing needs are seasonal and predictable, so that temporary employees can be hired in advance.

Stock options. Many employers have begun offering their workers stock options as compensation in lieu of actual overtime pay. In fact, studies show that as many as 10 million hourly workers in the United States had acquired stock options by the late 1990s. In 1999 employer rights to offer such stock options were codified into law with the passage and signing of the Worker Economic Opportunity Act. This act amends the Fair Labor Standards Act to exclude profits from stock options or purchase plans from the calculation of non-exempt employee's overtime if various requirements are met (such as full disclosure of terms and voluntary participation). Supporters of this new law contend that it will allow employers to offer stock options as incentives to hourly workers while safeguarding employees against businesses that might try to disseminate risky stock options in place of overtime pay.


Many employees welcome the opportunity to augment their regular salaries with overtime pay. Some businesses can effectively use overtime as a kind of voluntary bonus: if the employees are willing to put in the added hours, they will be rewarded with increased pay. Because of the strong positive feelings many employees have about the opportunity to earn overtime pay, employers should carefully weigh the pros and cons of hiring temporary help; regular employees will recognize the loss of overtime, and morale may suffer, particularly if overtime has become an integral part of the business cycle.

But the prevailing feeling among many business owners and executives is that employees are placing ever greater value on leisure/family time, and that they are willing to make some sacrifices in the realm of compensation in order to enjoy personal interests. In addition, analysts point out that families that have both parents in the work force may not value overtime as much as employees of the past. Employers should remain sensitive to employees' needs and responsibilities outside of the workplace, and should recognize that employees may not always be willing to volunteer for overtime.