Defining Small Business Failure

Abstract

JOHN WATSON IS A SENIOR LECTURER IN accounting and finance and Dr. Jim Everett is associate professor of management science, both in the School of Commerce, University of Western Australia, Australia. In examining small business mortality researchers have used, or suggested, a variety of definitions (or proxies) for failure. It has been argued that a lack of a reliable measure of failure is a major obstacle to understanding and alleviating the causes of small business mortality. The objective of this study is to examine various definitions (or proxies) for failure identified in the literature and to assess these definitions against a set of criteria that have been developed for this purpose. The history of 333 small businesses that began in the period 1973-1988 in six managed shopping centres in Western Australia are analysed to illustrate the variation in reported failure rates that result from using the various definitions. The results show that the reported average annual failure rate ranged from less than 1 per cent through to 14 per cent, depending on which definition of failure is adopted. The results also indicate the possibility for using modelling to estimate potentially more relevant failure rates using readily available data such as bankruptcy statistics.