Understanding failure in the small business realm

OPENSEED Digital Consultancy

“The majority, 61 per cent, of Australian businesses by number are sole traders with no employees. Micro business with 1-4 employees account for 27 per cent of Australian businesses. Small businesses with 5-19 employees comprise 9 per cent of Australian firms. Only 3 per cent of Australian businesses have 20 or more employees.”

Understanding failure in the small business realm

If last year’s statistics are anything to go by, this year over 300,000 businesses will start up in Australia. Most will be sole traders, and by 2021 around 50 per cent will have failed.

That’s the frightening reality faced by a generation of would-be entrepreneurs looking to dip their toe in Australia’s turbulent business waters. And it begs the question, why do so many Australian businesses fail?

Here’s an insight into the Australian business landscape and the common reasons that fledgling businesses fail.

Australia’s business landscape

Many a hard-working employee dreams of one day becoming their own boss. The lure of calling the shots, setting the schedule and answering only to yourself runs deep in Australian culture.

So deep, that according to the Australian Bureau of Statistics at the end of 2016-17, there were 2,238,299 actively trading businesses in the market sector in Australia, an increase of 3.1% (66,755 units) from the end of 2015-16.

In 2016, the Australian Small Business Ombudsman noted small businesses, employing less than 19 people, accounted for 97 per cent of the Australian business landscape.

“The majority, 61 per cent, of Australian businesses by number are sole traders with no employees. Micro business with 1-4 employees account for 27 per cent of Australian businesses. Small businesses with 5-19 employees comprise 9 per cent of Australian firms. Only 3 per cent of Australian businesses have 20 or more employees.”

The figures further show small business generates 44 per cent of the nation’s employment, 33 per cent of Australia’s GDP, and pays around 12 per cent of total company tax revenue.

But despite their employment, social and economic contribution, many a small business fails.

“It would seem that sole operators with no employees are the most short-lived with a survival rate of only 56 per cent,” the Ombudsman reflected.

“Survival rates increase with firm size: micro businesses with 1 to 4 employees had a survival rate of 68 per cent. Small businesses with 5-19 employees had a survival rate of 77 per cent, medium sized firms had a survival rate of 82 per cent. The largest firms with over 200 employees had the highest survival rate of 83 per cent.”

But why, oh why, the attrition?

Prime reasons for failure

Reasons for business failure vary, and the likelihood is more than one contributes to closure, but according to last year’s insolvency statistics from the Australian Securities and Investment Commission the top three nominated causes of failure for companies were:

(a) inadequate cash flow or high cash use (46.7% of reports);

(b) poor strategic management of business (45.6% of reports);

(c) trading losses (35.5% of reports)

Meanwhile a University of Technology, Sydney report notes 12 common reasons for business failure. They are:

  • Insufficient sales, too few customers compared to the cost of operating
  • Poor location and lack of customer convenience
  • Bad costing, delayed invoicing
  • Giving too much credit, resulting in bad debts and slow payment
  • Inventory problems – slow-moving or dead stock and shortfalls
  • Inability to borrow funds
  • Poor staff, customer and public relations
  • Let down by suppliers, inability to obtain raw materials as required
  • Poor promotion, marketing and advertising causing poor image
  • Poor quality workmanship, inadequate quality management
  • Lack of industry or product knowledge, or lack of knowledge of market forces
  • Poor cash control and pilfering of goods/cash/profit


So, now the reasons small businesses fail have been identified, what can you do to prevent them?

Time spent in reconnaissance is seldom wasted

Whether you’re starting up, buying in or growing your business, experts agree research and planning is key.

For new businesses this includes market research, a feasibility study, SWOT analysis of your Strengths, Weaknesses, Opportunities, and Threats, and a comprehensive business plan.

Dunn and Bradstreet explains many start-ups fail due to inexperience alone.

“Businesses are built on more than ideas and business success is rarely determined by a product or service alone. In order to succeed it’s vital you conduct the research and planning necessary to strongly position your business.

“New business owners often fail because they have the long-term vision without considering the processes necessary to keep the business viable in its immediate future.”

They also fail to understand their customer.

“In order to win customers and new business you need to understand your market. Before opening your doors for business, you should be able to answer who your customers are, what are their buying habits and which competitors they are currently buying from,” Dunn and Bradstreet continues.

“It’s also equally important to know what makes your product different and understand where your competitive advantage lies.”

Meanwhile, if you’re seeking to take over an established business, research is no less important. Due diligence is imperative including detailed investigation of the enterprise’s finances, liabilities, and SWOT.

If you fail to plan you plan to fail

Planning is essential throughout the life of a business and it encompasses every aspect of an enterprise, from marketing to market research, finances and product development.

A comprehensive business plan enables business operators to identify their strengths and potential threats. It lists assets, and liabilities and hones the systems and procedures that underlie any venture.

It will also address the threat of lack of management within a business, which is another factor Dunn and Bradstreet attributes to the high business failure rate.

“…in most cases SME owners will have an idea about how a business is run but not a complete understanding about what is necessary to run the business. Management considers the broader scheme of keeping your business afloat and involves all activities from planning to communicating and coordinating.”

A business plan is also the essential document required for investment and funding, and this plan changes, alters and is refined as a business matures.

A head for figures

In the business realm, cash is king. It’s the bottom line that determines viability and equals failure or success. But small businesses have a notoriously hard time maintaining liquidity. Whether it’s due to inadequate initial funding, a slowing of the market, too many debts, or clients being slow to pay, the figures of business can be challenging and volatile.

Dunn and Bradstreet notes business will always experience downward trends.

“In order to survive early on you need a strong financial backing to cover for slow periods,” they suggest.

But it’s not just a lack in initial funding that can result in a small business’ demise. Last year ASIC identified the following common financial reasons that small businesses go into insolvency.

Of the 19,315 small businesses where external administrators were appointed, the prime reason identified was:

  • Inadequate cash flow or high cash use – 3626 cases
  • Poor financial control, including lack of records – 2739
  • Under-capitalisation – 1564
  • Poor management of accounts receivable – 911

Business is not for the faint hearted, nor for the underprepared, but it’s importance for the Australian economy and employment is not to be underestimated. Nor are the highs that come with achieving real and long-term business success.

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