WHY MERCHANTS FAIL 1. General causes of failure.—Inasmuch as the modern credit man is interested not merely in refusing credit to weak and failing dealers, so as to save his house from losses arising from unpaid accounts, but also, as described in the preceding chapter, in helping the inexperienced dealer to avoid the rocks upon which his ship of business is in danger of being wrecked, it follows that he is also interested in studying closely the various causes that contribute to business failures. Obviously, if the credit man is to be a successful busi ness physician, he must first study the ailments for the symptoms of which he is to prescribe.
Statistics demonstrate that about eighty per cent of business failures are due to faults on the part of those who fail. Therefore such failures are to a large ex tent preventable. Until a relatively short time ago, however, little had been done by way of systematic investigation of the specific causes that shorten the business life of dealers and add to the economic loss annually sustained by the business world.
2. Business survival statistics.—Mr. Stanley A. Dennis, in System for January, 1916, relates the re suit of an investigation of the duration of business enterprises in the town of Waterloo, Iowa. Some of his findings are startling. Basing his figures on the history of 266 factories in that town, the investigator found that the average life of a manufacturing busi ness is only six years. He also found that about sixty per cent of factories close their doors within five years from the date of opening. Retail stores ap parently fare but little better, since forty-five per cent of these, according to Mr. Dennis, become ex tinct within a similar period.
While these figures are not adapted to show ac curately the frequency of failure, since causes other than business failure had to do with the closing of some of the enterprises and since local conditions also may have influenced the result, they are nevertheless believed to be sufficiently accurate to prove that a surprisingly large number of the persons who start in business, fail to succeed, and that many end their business career within a relatively short period.
But we are not to suppose that failures cease with the fifth year. According to Mr. Dennis, the length of life of thirty-three plants that were in operation in 1886 was as follows: 3. Chief causes of failure.—The two immediate and outstanding causes of business failure are overbuying and poor collection methods. Could these evils be eliminated it is probable that at least seventy-five per cent of present failures would be averted. It is in teresting to note that in certain lines of trade, over buying is found to be the chief cause of failure, while in certain other lines poor collection methods occupy first place. In the dry-goods business, overbuying is believed to be responsible for more than one-half of the total number of failures. But in the grocery busi ness the predominant evil is poor collections. The hardware business seems to suffer about equally from overbuying and poor collections.
Next to the causes already mentioned, two others demand attention. They are (1) poor location and (2) bad accounting. In some lines of business, poor location is held responsible for fully one-quarter of the total number of failures. The success of a cigar store, for example, depends largely upon its location. It is well-known that the United Cigar Stores Com pany and other efficiently operated concerns, make exhaustive tests of location before opening a new store. Poor judgment here may predetermine fail ure.
The use of poor accounting methods is an evil that produces a number of costly mistakes, as will be shown presently.
Lack of capital as a cause of failure in business ap pears chiefly in connection with overbuying, since the latter term simply means that the available capital has been tied up in slow-moving or unsalable stock. While this may be the fate of one dealer, another hav ing no larger capital but exercising greater care in buying may make his capital suffice. The question is not always so much how large the capital is, as how carefully it is employed.