A FACTOR ANALYTIC STUDY OF THE PERCEIVEO
CAUSES OF SMALL BUSINESS FAILURE*
by LiiAnn Ricketts Gaskill, Howard E. Van Auken, and Ronald A. Manning
The important role of small business in
the U.S. economy suggests that an un-
derstanding of why firms fail (and are
successful) is crucial to the stability and
health of the U.S. economy. Robinson
and Pearce (1984) recognized a growing
interest, statewide and on the federal
level, in identifying factors associated
with the conduct and performance of
small firms. An understanding of such
factors would enable public policyma-
kers and small business advisors to bet-
ter serve the small business sector.
Cochran (1981) suggests that research on
business failure for subgroups of the
small business sector would prove use-
ful, and that research on business fail-
ures for specific industries in regions
might be more useful than studies that
are national in scope.
Consistent with the advantages cited
by Robinson and Pearce (1984), and
Cochran (1981), the focus of this study is
limited to a single industry within one
region of the country. An analysis of the
distribution of the total U.S. small busi-
•This research was funded in part by the Iowa Small Busi-
ness Development Center and Iowa State University Cooper-
ative Extension (Rural Development).
Dr. Gaskill is an associate professor in the Department of
Tfextiles and Clothing at Iowa State University. Her research
interests are in the areas of apparel and accessory merchan-
dising, small business apparei retail management, small busi-
ness failure, and rural retailing.
Dr. Van Auken is an associate professor of finance at Iowa
State University. His research interests are in the areas of
small business finance, finance issues, and entre-
preneurship.
Mr. Manning is the state director of Iowa Small Business
Development Centers.
18 Journal of Smail Business Management
ness population identified retail trade as
the largest sector of the small business
industry {Handbook of Small Business
Data 1988). In terms of specified kinds
of retail businesses, the most current
Census of Retail Trade for Iowa (1982)
lists apparel and accessory stores as the
most numerous types of retail establish-
ments. This article, therefore, presents
the results of a sfudy that examined per-
ceived causes of small business failure in
the apparel and accessory retailing in-
dustry. Such research would be useful in
identifying practices to be avoided and
in aiding educators, consultants, and
small business support agencies in meet-
ing the needs of the small business
community.
REVIEW OF THE LITERATURE
Recognizing the dynamic relationship
between the firm and its operating and
environmental characteristics,' Keats
and Bracker (1988) proposed a concep-
tual model of small firm performance.
This model suggests that performance
outcomes are a function of many varia-
bles, including individual owner charac-
teristics, owner behaviors, and
environmental influences. Their model,
grounded in strategic, entre-
preneurship, and organizational theory,
transcends the belief that small firms
are merely miniature versions of large
businesses and recognizes small firms as
unique entities.
, According to Keats and Bracker
(1988), small firm performance is influ-
enced by multiple constructs which
have been labeled as "Entrepreneurial
Intensity" (entrepreneurial characteris-
tics and behaviors which differentiate
entrepreneurs from other individuals);
'"Iksk Motivation" (intensity of entre-
preneurial motivation to attain goal
achievement); "Perceived Strength of
Environmental Influences" (strategic
choices and reactions in response to en-
vironmental elements); "Behavioral
Strategic Sophistication" (acquisition
and implementation of sophisticated
strategic management practices); "Cog-
nitive Strategic Sophistication" (com-
prehension and integration of strategic
management practices); and "Tiisk Envi-
ronment Factors" (structure of the in-
dustry in which the organization
operates). These six constructs have
been proposed as substantial influences
of small firm performance outcomes.
Performance outcomes in the Keats and
Bracker model includes a number of in-
terpretations and measures including fi-
nancial performance. The Keats and
Bracker model is meant to provide a ba-
sis for explaining how owner character-
istics, behaviors, and contextual factors
relate to small firm performance.
Small firm performance has been stud-
ied from a variety of approaches to bet-
ter understand why some firms fail and
why others succeed. Weitzel and
Jonsson (1989) discuss business failures
as being the last stage of an organiza-
tion's life cycle. Organizational decline,
leading to failure, is characterized by
managers who have become reaction-
ary. The result is inadequate or non-
existent planning and inefficient
decision-making. One of the earhest em-
pirical studies (Larson and Clute 1979)
examined the role of various owner and
firm characteristics to explain business
failures. The numerous characteristics
shared by failed firms are directly re-
October 1993
lated to personal decision-based charac-
teristics of the owner (lack of insight,
inflexibility, emphasis on technical
skills, etc.), managerial deficiencies
(lack of management skills and appropri-
ate managerial training, etc.) and finan-
cial shortcomings (no accounting
background, cash flow analysis, finan-
cial records, etc.). In contrast. Star and
Massel (1981) tied failure rates to the
type of business. Failure rates were
higher for firms that (1) were smaller in
size, (2) were located in rural areas, (3)
sold low priced merchandise, and (4) op-
erated as sole proprietorships.
Peterson, Kozmetsky, and Ridgway
(1983) provide supporting evidence for
these reasons. Their survey, which asked
existing firms why businesses failed,
found that lack of management exper-
tise and financial-related factors were
most cited. Wichmann (1983) reported
that accounting and management capa-
bilities were important attributes affect-
ing small business success and failure.
Boardman, Bartley, and Ratliff (1981) re-
ported that rapidly growing firms often
fail due to the financial stress of the
growth. For example, the rapidly grow-
ing but failed firm had increasing sales
concurrent with higher cost of goods
sold, greater debt, and smaller profit
margins. The important relationship be-
tween financial distress and bankruptcy
was recognized early by Beaver (1968)
and Altman (1968). Numerous studies,
including recent studies by Gentry,
Newbold, and Whitford (1987), GUbert,
Krishnagopal, and Schwartz (1990),
Laitinen (1991), and Thomas and Evan-
son (1987) have continued to emphasize
the importance of following a firm's fi-
nancial performance to recognize im-
pending bankruptcy.
O'Neill and Duker (1986) examined the
role of managerial quality and found
that failed firms have greater debt loads,
relied less on the advice of accountants
and offered more inferior products than
19
did surviving firms. Dekimpe and Morri-
son (1991) examined the life expectancy
of retail stores and found that appropri-
ate management training programs and
a supportive atmosphere can increase
the duration of a firm's existence.
O'Neill and Duker (1986) also found
many respondents cited government
and government-related policies as be-
ing an important factor affecting busi-
ness failures. The impact of the federal
government and its policies were also
found to affect failure rates in studies by
Edmunds (1979) and Clute and Garman
(1980). Edmunds found that failure rates
were increased due to the heavy burden
of taxation and regulation, while Clute
and Garman identified the growth in
money supply (higher growth decreased
the failure rate) and the volume of bank
lending (higher volume of bank lending
reduced the rate of business failures) as
significant factors.
A summary of much of the research on
small business failures is reported by
Haswell and Holmes (1989). They report
managerial inadequacy, incompetence,
inefficiency, inexperience, etc., to be a
consistent theme explaining small busi-
ness failures. Many aspects of poor man-
agement are reported to be connected to
several related issues such as poor finan-
cial conditions, inadequate accounting
records, limited access to necessary in-
formation, and lack of good managerial
advice.
Many factors that are used to explain
small business failures also appear as
factors affecting small business success.
While the objective of this article is not
to examine factors affecting success, it is
important to recognize the relationship
between factors affecting success and
failure. Studies by Hofer and Sandberg
(1987), Ibrahim and Goodwin (1986),
Lumpkin and Ireland (1988), Montagno,
Kuratko, and Scarcella (1986), and Sus-
bauer and Baker (1989) consistently de-
termine and discuss the importance of
20 Journal of Small Business Management
managerial planning, managerial skill,
development, and financial planning in
relation to a firm's success. The studies
also highlight the critical importance of
the characteristics of the entrepreneur
in determining the success of the
business.
The results of previous studies have
suggested that a large number of factors
contribute to small firm failure. How-
ever, the quantity and variety of factors
identified in the small business failure
literature results in fragmented find-
ings. This study is designed to present a
more comprehensive analysis of small
business failure by consolidating many
of the previous research findings into a
singular study that addresses opera-
tional aspects of the business which may
be contributing to business perform-
ance. Although the previous studies do
not provide a comprehensive or unified
explanation for small firm failure, sev-
eral common themes are evident. While
these common themes may be described
as being independent, the factors found
to be related to failure should be recog-
nized as being interrelated. For exam-
ple, poor management skills may result
in poor financial and asset allocation de-
cisions, which may lead to financial dis-
tress and failure.
Poor managerial skills have commonly
been associated with firm failure.
Weitzel and Jonsson (1991) describe cri-
ses management and lack of planning as
one of the last stages prior to failure.
Haswell and Holmes (1989) report poor
management as a common theme in the
small firm failure literature. Numerous
other earlier studies (Peterson, Koz-
metsky, and Ridgway 1983; Wichmann
1983; O'Neill and Duker 1986) have pro-
vided similar evidence.
Another common theme emerging
from the previous research is the impor-
tant relationship between financial dis-
tress and failed firms. Financial-related
factors, commonly measured by finan-
.cial ratios, were early used as predictors
of bankruptcy (see, for example. Beaver
1968; Altman 1968). Other studies have
identified financial distress factors as
being strongly associated with business
failure (Peterson, Kozmetsky, and Ridg-
way 1983; Wichmann 1983; Haswell and
Holmes 1989). A factor closely related to
financial distress, rapid growth, and the
associated resulting financial con-
straints, have been recognized as often
leading to financial distress and failure
(Boardman, Bartley, and Ratliff 1981;
Brigham and Gapenski 1991).
Several studies have suggested that
the firm's inability to compete in the
market results in failure. Star and Massel
(1981), and O'Neill and Duker (1986) as-
sociate internal factors, such as small
size, poor location, and cheap merchan-
dise, as being related to failure. Earlier
studies (Clute and Garman 1980,
Edmunds 1979) cited government poli-
cies as having an important impact on a
firm's ability to operate in the market-
place.
PURPOSE OF THE STUDY
The primary purpose of this research
was to identify those factors perceived
to contribute to the failure of small busi-
ness apparel and accessory retailers in
Iowa. More specifically, the question
posed based on the literature review is:
Will discontinued small business apparel
and accessory retailers perceive causes of
their business failure to relate to common
failure themes of poor managerial skills, fi-
nancially oriented problems, and inability
to compete in the market place?
In addition, Keats and Bracker's (1988)
conceptual model of small firm perform-
ance wiU be applied in an explanatory
capacity to determine its usefulness in
identifying factors that contribute to
small business failure.' A major contri-
'In accordance with the U.S. Small Business Administra-
tion, small business in retailing was defined as a retail store
having fewer than 100 employees.
October 1993
bution of this study is an intensive anal-
ysis of small business failure in a
specialized industry. Such an analysis is
beneficial in that it allows for a mini-
mum of extraneous factors that might
influence the results. This study also
contributes to the small business litera-
ture by offering a timely and current
analysis of small business faUure during
the late 1980s and early 1990s. An in-
creased awareness of perceived business
failure causes during this dynamic eco-
nomic time period may result in a better
understanding of the challenges and dif-
ficulties small business owners face dur-
ing lean economic periods.
SAMPLE AND METHODOLOGY
Selection of the Sample
The sample consisted of previous small
business owners who experienced busi-
ness faUure in apparel and accessory re-
tailing between 1987 and 1991. For the
purpose of this study, business failure
was defined as wanting or needing to
sell or liquidate to avoid losses or to pay
off creditors or general inability to make
a profitable go of the business.
Two methods were used to identify
the sample since no listings of past busi-
nesses were available in the state. The
Iowa Department of Revenue sales tax
permit tapes were used to identify busi-
ness discontinuances between 1987 and
1988. Standard Industrial Classification
(SIC) code numbers offered a means of
identifying businesses with apparel and
accessory product lines.'' This process re-
sulted in the location of 110 previous
business owners.
An alternative source of business dis-
continuance was necessary since the De-
partment of Revenue tapes did not
contain information on business discon-
^Standard Industrial Classification Codes included in this
study were SIC #6611 {Men's and Boy's Clothing and Acces-
sory Stores), SIC #5621 (Women's Clothing Stores), SIC #5632
(Women's Accessory and Specialty Stores), SIC #5641 (Chil-
dren's and Infant's Wear Clothing), SIC #5651 (Rimily Cloth-
ing Stores), SIC #5661 (Shoe Stores), and SIC #5699 (Misc.
Apparel and Accessory Stores).
21
tinuance from 1988 to 1991. Through
listings in the World Chamber of Com-
merce Directory (1990), letters were
sent to aU of the 181 chamber of com-
merce directors in Iowa asking for the
names and addresses of all local apparel
and accessory retail businesses that
were discontinued between 1988 and
1991. Of the 181 chamber of commerce
directors, 158 (87.3 percent) identified
135 past business owners. Therefore,
the total sample consisted of 245 apparel
and accessory small business owners
who discontinued operation between
1987 and 1991.
An attempt was made to contact each
of the 245 business owners to verify that
their business had been discontinued
X and that the discontinuance was due to
financial failure. Of the 245 businesses,
40 were ineligible (still in operation,
nonclothing/accessory business, never
in business, etc.), 15 could not be lo-
cated by telephone (no forwarding ad-
dress, out of state, in prison, etc.), and 8
individuals declined to participate in the
study.
Of the remaining 182 previous busi-
nesses, 130 (71.4 percent) were discon-
tinued due to financial difficulties
(selling or liquidating to avoid losses,
selling or liquidating to pay off creditors,
or failure to make a profit) and 52 (28.6
percent) were discontinued as a result of
personal reasons (health, retirement,
personality conflicts, selling business for
a profit, etc.).
A questionnaire was sent to each of
the 130 small businesses that were iden-
tified as being discontinued due to fi-
nancial reasons. A modified version of
Dillman's Tbtal Design Method (1978)
was used in the survey methodology.
Ninety-one of the 130 small businesses
responded with completed and usable
questionnaires, providing a response
rate of 70 percent.
22 Journal of Small Business Management
Instruments
The research instruments included tel-
ephone interviews and mailed question-
naires incorporating open-ended,
closed-ended, and forced choice items.
The purpose of the telephone interview
was to identify those businesses failing
due to financial reasons. Mailed ques-
tionnaires were sent to businesses indi-
cating financial business failure. Both
the telephone interview schedule and
mail questionnaire were original instru-
ments developed from a review of the
literature and through consultations
with other researchers in textiles and
clothing, marketing, economics, and
management. Current business owners
and small business consultants in ap-
parel and accessory retailing were also
used in developing and validating the in-
struments. Instruments were pretested
with past smaU business owners. Modifi-
cations were made in content and length
based on the pretest results.
The questionnaire was divided into
two segments. One segment of the ques-
tionnaire addressed the small business
owners' perception of business discon-
tinuance. The previous small business
owners who indicated discontinuance
due to financial failures were asked to
respond to a randomly ordered listing of
35 items associated with business faU-
ure. These items, cited in the literature
as being related to business failure, in-
cluded: lack of a specific target market,
poor business site location, failure to
generate a long-term business plan, per-
sonal problems, high operating ex-
penses, etc. (Appendix A has a complete
listing of the items and their literature
sources). Each item in the questionnaire
was accompanied by a Likert-type scale
allowing perceived indication of the ex-
tent to which the item contributed to
the business failure. The Likert-type
scale ranged from 1 (to a very little ex-
tent) to 5 (to a very great extent). Re-
- sponses to this measure were based on
perceptions of the past business owners;
no attempt was made by the researchers
to independently validate these percep-
tions. In the second segment of the ques-
tionnaire, demographic data were
collected on gender, age, marital and
employment status, educational level,
total current household income, type of
business ownership, and years in busi-
ness prior to discontinuance.
Data Analysis
Factor analysis was used in an explor-
atory manner to analyze and summarize
the interrelationships among business
failure variables. The intent was to iden-
tify subsets of the original 35 variables
that were highly interrelated. Since the
number of subjects per measured varia-
ble was small in the original data set, the
exploratory analysis must be interpreted
tentatively. Although even this subject-
to-item ratio would be low if our objec-
tive had been formal statistical
inference about parameter estimates,
such a confirmatory analysis was not
our main objective.
An initial factor analysis was run with
all 35 variables. The first factor analysis
identified six factors, but interpretation
was not clear. Therefore, the 19 varia-
bles loading greater than .45 on the orig-
inal six factors were analyzed separately
in a second factor analysis. The reason
was to remove some of the "noise"
added by variation due to extraneous
variables. Variables with loadings
greater than .45 on one of the original
six factors with associated eigenvalues
greater than 1.0 were selected for use in
further analysis. A final factor analysis
was completed using the resulting 19
variables. Four factors (those with
eigenvalues greater than 1.0) were re-
tained and used to identify groupings of
items representative of business failure.
Variables with high loadings (greater
than .45) were considered to be repre-
October 1993
sentative of the characteristic reflected
by that factor. Orthogonal factor rota-
tion was used in the analysis since the
identification of a distinctive cluster of
variables was desired.
RESULTS AND DISCUSSION
Sample Demographics
Eighty-four (64.6 percent) of the past
small business owners were female and
46 (35.4 percent) were male. Respon-
dents ranged in age from 21 to 72 with
ages 41-50 being the largest group (28.3
percent), and 114 (88.4 percent) were
married. Some college or technical train-
ing beyond high school was reported by
47 (36.4 percent) of the participants.
Forty-four past business owners (34.1
percent) were high school graduates,
and 26 (20.2 percent) had graduated
from college. The largest percentage
(56.6 percent) were presently employed
full-time while 20 participants (15.5 per-
cent) reported a part-time employment
status. Over half (56.6 percent) were
presently in a two-income household.
Total household income ranged from less
than $15,000 annually to more than
$75,000 annually. The largest percent
(37.4 percent) of the past business own-
ers reported a household income in the
$15,000 to $30,000 range.
The majority of the participants (59.4
percent) were sole owners of their past
businesses. Sixty-nine (54.3 percent)
had started their own business while 55
(43.4 percent) had bought a previously
existing business. Over 60 percent of the
business owners had no previous experi-
ence with small business ownership. The
amount of money lost due to the busi-
ness failure ranged from less than $5,000
to over $20,000. Forty-five percent of
the respondents declined to indicate the
amount of money lost. The largest per-
centage (47.2 percent) of those who re-
sponded to the question reported
financial loss in excess of $20,000.
Ninety-four (76.4 percent) of the past
23
business owners were not currently op-
erating a small business establishment.
Over 90 percent had no intention of ever
operating another small business in
Iowa.
Factor Analysis Results of Small
Business Failure
Responses to the business failure
measure were analyzed by principal
component factor analysis with ortho-
gonal rotation. Four factors, accounting
for 64.5 percent of the variance ex-
plained, were used in this study. Rotated
factor loadings, communality (actual
variance explained by each variable)
and content of the factors are in table 1
along with eigenvalues, variance ex-
plained, and factor means.
The factor analysis extracted four fac-
tors (19 items) with item loadings rang-
ing from .51 to .85. Eleven items were
identified under Factor 1 with loadings
ranging from .82 to .51. An analysis of
these statements were interpreted as
items related to managerial and plan-
ning functions (Cronbach's alpha = .92).
Specific items loading on Factor 1 in-
cluded: inadequate knowledge of pric-
ing strategies; failure to generate a
long-term business plan; ineffective ad-
vertising/promotional strategy; lack of
managerial experience, skills, and train-
ing; failure to generate a personnel plan;
failure to generate a merchandise assort-
ment plan; lack of experience in the
product line; inflexible decision-making;
lack of knowledge of current business
literature; poor use of outside advisors;
and ineffective interior store layout
pattern.
Managerial and planning functions of
the firm are comprehensive and include
almost every aspect of the business. This
is evident from the items in Factor 1
which include pricing, business plan-
ning, advertising, and promotion, mana-
gerial skills, personnel, product and
24 Journal of Small Business Management
merchandise, etc. The importance of -
managerial and planning skills has been
a commonly discussed issue related to
the performance and the failure/success
of the small firm. Managerial effective-
ness influences every aspect of a busi-
ness and is often believed to be the most
important factor contributing to small
business failure. Haswell and Holmes
(1989) reference several studies which
show that managerial inadequacy is the
primary cause of small business failures.
Larson and Clute (1979) and Wichmann
(1983) discuss at length the importance
of managerial skills for the success of
the firm.
Factor 2 identified factor loadings
ranging from .74 to .58 (Cronbach's al-
pha = .71). These items related to ven-
dor relations included: poor relations
with vendors; difficulties in receiving
merchandise; and inadequate financial
accounting or record keeping.
Working capital management is re-
lated to the day-to-day operations of the
firm. Many activities of the firm are re-
lated to working capital management in-
cluding poor vendor relations (part of
working capital management) which has
a direct impact on the viability of the
firm. If the firm is unable to obtain mer-
chandise due to poor vendor relation-
ships then customers may patronize
competitors. Poor record keeping can
also lead to strained relationships with
vendors which may result in difficulty in
obtaining and receiving merchandise.
Inadequate working capital decisions
and accounting information have been
referenced consistently as causes of
small business failure. Researchers
(Haswell and Holmes 1989, Larson and
Clute 1979, O'Neill and Duker 1986,
Wichmann 1983) discuss the impact of
poor working capital management, in-
sufficient accounting infonnation, and
the resulting inadequate financial con-
trol on the firm's operations. Ineffective
decision-making relative to these varia-
 CO T-
00 <o

C\J
to CO i

00 t
in P '^ T
cJ d d 1-^
1- in

cj> N. r-. I

c
O) JO
c Q. o>
'c c
<B
>.-<5 to •Q.
w O> Q. •a c
o
c o I I •<o
c
2 to .E c i :^ (b <u 8 a>
•5 2
c <2 CD
xj "- «=6 (U •)
C D) (/) 0) C <u
1= .Q CO C
2« « .E^
as _3

s|l m o
Q . CO

m g- i
|P
£ (0 o
•)
U) U)
m (u
<D -^
a>iiJ
is
|§
C Q.U)
> <i> <i> 0) o ) . 2 <B .9J 3 ^ ^ 0) CO 2 E >-

III
M "- t=
c c *=
O - (D (U " (D CO .^
_3
;5Sio

S.ELLU...£_I.EU iD._i
£3 a-
•_ o . S
§iira
Q-QS
raB
ii .im 1
LUD-OLL! ^
• o CO C3> CM CO c» 00 i n CM co co CO 00 ^ ^ O
OJ ^ 1 - T - C M CM CJ COCMi- CO T- rt T- rt

October 1993 25
bles can also be attributed to poor mana-
gerial and planning skills.
Factor 3 addressed the competitive en-
vironment. Specific items were: compe-
tition from discount stores; inability to
compete in trading area; and failure to
offer saleable merchandise assortments.
Factor loadings ranged from .61 to .85
(Cronbach's alpha = .69).
The variables included under competi-
tive environment are directly related to
the ability of the small firm to success-
fully operate and compete in its environ-
ment. Two factor items, competition
from discount stores and inability to
compete in the trading area, affect the
ability of the firm to be successful
against market competitors of aU sizes
and types. One reason that the firm is
unable to compete in its market area
may be that merchandise is not salable
or competitive in comparison to other
firms in the market. The impact of the
competitive environment is also a fre-
quent theme that has been found to
cause smaU firm failures. Star and Mas-
sel (1981) discuss how various aspects of
the firm's environment affect firm per-
formance. The importance of high qual-
ity services and products is consistently
cited as a component of successful firms
(Hofer and Sandberg 1987). These varia-
bles are also closely related to manage-
rial effectiveness and planning since
inabUity to compete and merchandise
offered are a direct consequence of
management decisions.
Factor 4 identified two items which
appeared to be related to growth and
overexpansion. Items were premature
business growth/overextension and in-
ventory difficulties. Factor loadings
were .82 and .61 (Cronbach's alpha =
.57). The researchers recognize that reli-
ability on Factor 4 was low, but because
items were conceptually related they
were included in the study results.
Growth and overexpansion are often
cited as sources of a small firm's finan-
26 Journal of Small Business Management
cial distress (Brigham and Gapenski
1991). Inventory difficulties are directly
related to rapid growth, since growing
firms must acquire and finance the in-
ventory prior to the sale of goods.
Growth constraints and the financial
consequences of rapid growth and/or
overexpansion have been discussed as
related to small firm performance and
success. Rapid expansion often leads to
capital shortages, financial distress,
and, ultimately, failure. Blue, Cheat-
ham, and Rushing (1989) discuss the
firm's increased financial risk exposure
and increased likelihood of failure at
each stage of expansion.
Several items were eliminated from
the study due to low factor loadings, in-
cluding areas related to merchandising
(sales planning), marketing (lack of a
specific target market, site location,
training of sales personnel), financial-
related items (inadequate sales level,
high operating expenses, undercapitali-
zation, poor cash flow management, ex-
penses, fixed assets) and those items
beyond the control of the firm (high
taxes, high interest rates, federal regula-
tions, poor economic conditions, and
fraud/disaster). Several of these items
have been previously cited as being im-
portant factors contributing to failure. It
is possible that during expansionary per-
iods, such as the period of time when
firms in this study would have failed,
financial-related items and the burden
of those factors which are beyond the
control of the firm become less impor-
tant contributors to failure. These items
may be more important during periods
of economic distress.
IMPLICATIONS FOR THEORY ON SMALL
FIRM PERFORMANCE
This study found that perceived fail-
ure factors of discontinued smaU busi-
ness apparel and accessory retailers
clustered in four areas. Consistent with
the findings of Haswell and Holmes
 (1989), poor managerial functions (Fac-
' tor 1) surfaced as a failure factor. These
findings also support the work of Larson
and Clute (1979), Peterson, Kozmetsky,
and Ridgway (1983), and Wichmann
(1983). Keats and Bracker (1988) pro-
posed that the ability to comprehend
and integrate strategic management
practices is contingent upon the process
of cognitive development, which
evolves through a series of stages that
are dependent upon environmental
challenges and individual responses.
This concept is closely related to
Factor 1 (managerial and planning func-
tions). Having adequate skills is critical
for the owner to process information
and make decisions relative to the varia-
bles that are part of Factor 1. According
to Keats and Bracker, the "neophyte
entrepreneur at a very early stage of
cognitive strategic sophistication would
not be prepared to comprehend and em-
ploy sophisticated management con-
cepts and techniques. . ." (1988, 52).
Poor decisions are the result of inade-
quate decision-making skills, leading to
financial distress and failure. Factor 1
includes the important areas in which
poor decision skills are present.
The relationship between financial
distress and failure was also prevalent in
this study with working capital manage-
ment (Factor 2) and growth and overex-
pansion (Factor 4) surfacing as failure
factors similar to previous research find-
ings (Boardman, Bartley, and Ratliff
1981; Brigham and Gapenski 1991; Has-
weU and Holmes 1989; Wichmann 1983).
The third factor, related to the competi-
tive environment, emerged through dif-
ficulties in competing with discount
stores and competition in trade areas.
These findings are consistent with the
research of Edmunds (1979), Larson and
Clute (1979), and Peterson, Kozmetsky,
and Ridgway (1983). Keats and Bracker's
(1988) "behavioral strategic sophistica-
tion" refers to the ability of the firm to
October 1993
actually engage in planning. Evidence is
presented suggesting that a positive re-
lationship exists between the amount of
planning which the firm undertakes and
its financial performance. This concept
is closely related to Factor 2 (working
capital management). Factor 3 (compet-
itive environment), and Factor 4
(growth and overexpansion). Without
good planning, the firm's performance
deteriorates in many areas. The ability
of the firm to successfully compete
against competitors, to target market
niches, and to offer saleable goods are
part of the business planning process.
Good planning is essential prior to
growth to ensure that growth demands
do not lead to financial distress. Factors
2, 3, and 4 are also closely related to
Keats and Bracker's concept of "per-
ceived strength of environmental influ-
ences," or the perceived degree to
which owners believe they can predict,
control, and influence their environ-
ment. Keats and Bracker contend that
owners who believe they have a high
level of influence over the critical as-
pects of the environment do not per-
ceive high levels of risk in the business.
The results may be poor managerial
planning reflected in inattentiveness to
working capital concerns, inadequate
responses to competitors and customers,
and poor planning prior to engaging in a
growth strategy.
WhUe these factors offer insight into
areas perceived to contribute to busi-
ness failure, they also are useful in aid-
ing in the identification of research
questions yet to be answered. An analy-
sis of the planning functions in Factor 1
suggest that failed business owners may
not have engaged in the operational and
strategic planning process resulting in
deficiencies in personnel, inventory,
marketing, and financial planning. Fur-
ther research is needed to determine if
significant differences do exist in the op-
erational and strategic planning func-
27
tions between successful and failed
small business retailers.
Items in Factor 1 also suggest that
voids exist in the training and skiU level
of this select group of retaUers. It is pos-
sible that limited past experiences have
resulted in voids in the technical and
managerial skills necessary for effective
business operation in that over half of
the study participants reported no pre-
vious experience with small business
ownership. An area for further research
is the extent to which past business ex-
periences (education, training, work)
contribute to business performance.
The external business environment is
an area perceived to contribute to busi-
ness failure. Items such as "poor rela-
tions with vendors," "difficulties in
receiving merchandise," "competition
from discount stores," "inability to com-
pete in trading area" and "failure to of-
fer saleable merchandise assortments"
suggest failed small business owners are
ineffective in functioning in the envi-
ronment in which they operated. Ques-
tions arise as to the use and
effectiveness of marketing strategies in
operation; strategies for product/service
differentiation from competitors includ-
ing mass merchants and discount stores;
and how small business retailers com-
pete in the market for price and product
from supply sources. Further research
needs to address external market va-
riables/strategies and their impact on
small business performance.
Recognition also must be given to the
critical role of managing as this function
permeated throughout the study find-
ing; managerial decisions affect the
planning process, finances or working
capital, responses to the competitive en-
vironment, and decisions on growth and
expansion. Insight into effective mana-
gerial styles and techniques employed
by small business practitioners could be
fertile ground for analysis.
28 Journal of Small Business iVIanagement
Study results also aid in the identifica-
tion of problematic areas for business
owners which should prove useful to
small business support agencies, coun-
selors, and consultants. Assistance
needs are warranted in financial man-
agement, competition and growth strat-
egies, but perhaps, most importantly, in
managerial planning areas. Training pro-
grams and small business support en-
deavors need to focus on equipping
small business practitioners with the
managerial skills necessary for effective
smaU business operation as well as a con-
ceptual and cognitive understanding of
how these functions affect business per-
formance. However, while such assist-
ance would seemingly prove fruitful for
small business managers, questions arise
as to whether these outside support sys-
tems are being effectively utilized by
their target audience. The identification
of the perceived failure items "lack of
current business literature" and "poor
use of outside advisors" suggest that
some faUed small business owners are
not effectively utilizing such support
systems. Modified marketing and com-
munication strategies may be
warranted.
The small business literature acknowl-
edges that failure is attributed to many
factors in the external and internal envi-
ronment. This research furthers the
field of study through the identification
of clusters of items or factors which
were perceived as contributors to failure
by those business owers who had actu-
ally experienced business discontinu-
ance due to financial failure. Many
questions are still to be resolved and
warrant additional exploration into the
small business environment. In order to
further advance our insight into small
business failure, comparisons are
needed between successful and failed
small business owners, although recog-
nition is given to the difficulties in-
volved in obtaining usable samples from
the small business failure population.
Further researchers also need to study
differing segments of the small business
population to determine if similar find-
ings emerge. Studying the effects of
business failure factors related to the
firm's characteristics could also prove in-
sightful. This research needs to be dupli-
cated in other geographic areas to
determine the generalizability of the
study results. Such insight and addi-
tional research efforts will be useful in
the potential evolvement and develop-
ment of a theory of small business
failure.
While the study results show that ap-
parel and accessory small business fail-
ures are a result of poor performance
and inefficiencies in four general areas,
neither the factors nor the variables
within each factor should be viewed as
being independent. The smaU business
firm operates in a dynamic environment
where the effects of poor managerial
performance and changing environmen-
tal characteristics permeate throughout
the organization.
REFERENCES
Altman, E. (1968), "Financial Ratios,
Discriminant Analysis and the Pre-
diction of Corporate Bankruptcy,"
Joumal of Finance 23 (September),
589-609.
Beaver, W.H. (1968), "Alternative Ac-
counting Measures as Predictors of
FMlure," Accounting Review 43 (Jan-
uary), 113-122.
Blue, T, C. Cheatham, and B. Rushing
(1989), "Decision Thresholds and the
Developmental Stages in the Expand-
ing Business," Joumal of Business
and Entrepreneurship 1 (March), 20-
28.
Boardman, CM., J.W. Bartley, and R.B.
Ratliff (1981), "Small Business
Growth Characteristics," American
Joumal of Small Business 5 (Winter),
33-42.
October 1993
Brigham, E.F., and L.C. Gapenski(1991),
Financial Management: Theory and
Practice. Hinsdale, 111.: Dryden Press.
Census of Retail Trade, Geographic
Area Series, Iowa (1982), U.S. De-
partment of Commerce, Bureau of
the Census.
Clute, R.C. (1979), "An Analysis of Ac-
counting Related Problems in SmaU
Business Fkilure," The National Pub-
lic Accountant 24 (December), 24-26.
Clute, R.C, and G.B. Garman (1980),
"The Effect of U.S. Economic Policies
on the Rate of Small Business Fail-
ure," American Journal of Small
Business 5 (Summer), 6-12.
Cochran, A.B. (1981), "Small Business
Mortality Rates: A Review of the Lit-
erature," Joumal of Small Business
Management 19 (October), 50-59.
Dekimpe, M., and D. Morrison (1991),
"A Modeling Framework for Analyz-
ing Retail Store Durations," Joumal
of Retailing 67 (Spring), 68-92.
Dickinson, R. (1981), "Business Failure
Rate," Annerican Joumal of Small
Business 6 (FaU), 17-25.
Dillman, D.A. (1978), Mail and Tele-
phone Surveys: The Total Design
Method. New York: Wiley.
Edmunds, S.W. (1979), "Differing Per-
ceptions of Small Business Prob-
lems," American Joumal of Small
Business 3 (April), 1-14.
Gentry, J., P Newbold, and D. Whitford
(1987), "Funds Flow Components, Fi-
nancial Ratios and Bankruptcy,"
Joumal of Business Finance and Ac-
counting 14 (Winter), 595-606.
Gilbert, L., M. Krishnagopal, and K.
Schwartz (1990) "Predicting Bank-
ruptcy for Firms in Financial Dis-
tress," Joumal of Business Finance
and Accounting 17 (Spring), 161-171.
29
Handbook of Small Business Data
(1988), U.S. Small Business Adminis-
tration, Office of Advocacy.
HasweU, S., and S. Holmes (1989), "Esti-
mating the Small Business Failure
Rate: A Reappraisal," Journal of
Small Business Management 27
(July), 68-74.
Hofer, C.W., and W.R. Sanberg (1987),
"Improving New Venture Perform-
ance: Some Guidelines for Success,"
American Journal of Small Business
12 (Summer), 11-25.
Ibrahim, A.B., and J.R. Goodwin (1986),
"Perceived Causes of Success in
Small Business," American Journal
of Small Business 11 (FaD), 41-50.
Keats, B.W., and J.S. Bracker (1988),
"Toward a Theory of SmaU Firm Per-
formance: A Conceptual Model,"
American Journal of Small Business
12 (Summer), 41-58.
Laitinen, E. (1991), "Financial Ratios
and Different Failure Processes,"
Journal of Business Finance and Ac-
counting 18 (September), 649-673.
Larson, CM., and R.C. Clute (1979),
"The FaUure Syndrome," American
Journal of Small Business 4 (Octo-
ber), 35-43.
Lumpkin, J.R., and R.D. Ireland (1988),
"Screening Practices of New Business
Incubators: The Evaluation of Criti-
cal Success Factors," American Jour-
nal of Small Business 12 (Spring),
59-81.
Montago, R.V., D.F Kuratko, and J.H.
Scarcella (1986), "Perceptions of
Entrepreneurial Success Characteris-
tics," American Journal of Sm,all
Business 10 (Winter), 25-43.
30 Journal of Small Business iVIanagement
O'NeUl, H.M., and J. Duker (1986), "Sur-
vival and Failure in Small Business,"*
Journal of Small Business Manage-
ment 24 (January), 30-37.
Peterson, R.A., G. Kozmetsky, and N.M.
Ridgway (1983), "Perceived Causes of
SmaU Business Failures: A Research
Note," American Journal of Small
Business 8 (Summer), 15-19.
Robinson, R.B., and J.A. Pearce (1984),
"Research Thrusts in Small Firm Stra-
tegic Planning," Academ,y ofManage-
m£nt Review 9 {Janua.Ty), 128-137.
Star, A.D., and M.Z. Massel (1981), "Sur-
vival Rates for Retailers," Journal of
Retailing 57 (Summer), 87-99.
Susbauer, J . C , and R.J. Baker (1989),
"Strategies for Successful Entre-
preneurial Ventures," Journal of
Business and Entrepreneurship 1
(October), 56-66.
Thomas, J., and R. Evanson (1987), "An
Empirical Investigation of Associa-
tion Between Financial Ratio Use and
Small Business Success," Journal of
Business Finance and Accounting 14
(Winter), 555-571.
Weitzel, W., and E. Jonsson (1989), "De-
cline in Organizations: A Literature
Integration and Extension," Admin-
istrative Science Quarterly 34
(March), 91-109.
Wichmann, H. (1983), "Accounting and
Marketing—Key SmaU Business Prob-
lems," American Journal of Small
Business 7 (Spring), 19-26.
World Chamber of Commerce Directory
(1990), Loveland, Colo.: World Cham-
ber of Commerce Directory.
 Appendix A
REFERENCE LIST OF BUSINESS FAILURE MEASURES

STUDIES

>n, etai. 1983

rson , Clute 1979

4eiil, Duker1986

ann 1983
ids 1979
Jtel 979
c
3 1 E

ITEMS
u 2 O 1
Lack of a specific target market X X
Poor business site location X X
Ineffective interior store iayout pattern X
Failure to generate a long-term business plan X
Personal problems (health, marital, etc.) X
Ineffective advertising or promotional strategy X
High operating expenses (wages, rent, etc.) X
High taxes X X
Inadequate sales level X
Inadequate knowledge of pricing strategy X X
Undercapitalization or lack of staying power X X X
Inflexible decision making X
Failure to devise a merchandise assortment plan X
Premature business growth or overextension X
High interest rates X
Inadequate financial accounting record keeping X X
Federal regulations X
Inability to compete in trading area X X X
Lack of managerial experience, skills, & training X X X
Failure to generate a personnel plan*
Poor economic conditions X
Lack of a formal college education X
Poor cash flow control X X X X
Fraud/disaster X
Lack of knowiedge of current business literature X
Difficulties in receiving merchandise X
Excessive fixed assets X
Poor use of outside advisors X
Lack of experience in the product line*
Inventory difficulties X X X
Failure to generate a merchandise sales plan*
Poor relationship with vendors*
Competition from discount stores*
Failure to offer saleable merchandise assortments*
Poorly trained sales people*
* Based on expert panel input.

October 1993 31