5 Reasons for Failure in Australian Small Business

October 25, 2016

5 Reasons for Failure in Australian Small Business | AIA

Over the last two years, the number of businesses coming into the Australian economic market has risen by 1%. Though some might consider that an insignificant increase at first, the additional 1% represents an increase of 21,000 new businesses in Australia.

However, though this might appear to be a positive development for Australia’s economy, the reality is that, according to the Australian Bureau of Statistics, 60% of those new businesses will likely fail or wind up facing voluntary liquidation within the first three years of business.

What are some of the cited reasons for this high rate of failure for Australian business?

1. Inadequate due diligence when buying or starting a business

Failure to do your homework before going into the venture can be costly. Often, enthusiasm and excitement override thoughtfulness and strategy.

The lack of thoughtfulness and strategic planning is especially evident regarding online business which has become prolific because it is so easy to get started.

Here are some of the questions that are often neglected before a business gets going and only occur to people once the venture gets into trouble.

  1. Did you understand exactly what you were getting yourself into?
  2. What problems didn’t you anticipate when examining the opportunity through your rose-coloured glasses?
  3. Did you examine the concept from all angles and therefore didn’t get quite what you’d bargained for?

One strategy a business can employ to avoid this track is by outsourcing their business strategy to provide some objective perspective.

BusinessBasics, a firm specialising in Business Management Systems says,

“An outsourced business strategy consultant provides you with an external perspective, has specific experience in strategy development, identify risks and imparts knowledge on you and your team.”

Bringing in a strategy consultant has the benefit of experience and objectivity. You can bring them in as little or as often as you like and only pay for the service they provide.

2. Inability to Recover Debts

This is a perennial concern for all business large and small. Ventures that attempt to finance future growth with money they don’t yet have put themselves in peril.

“You did the work you were asked to do: You provided the service, and you deserved to be paid – but they refused to pay!”

Some Industries are more prone to this dilemma than others. Tradesman and those that provide services and are paid upon completion are among the most susceptible.

Nobody likes a client or customer that fails to pay. This is part of the course for small business and strategies need to be in place to deal with debtors.

3. Poor Financial Management

In many cases, the poor financial management that leads to business failure was the result of inadequate planning, organising and controlling of the financial activities of the startup.

A report released some time ago by the Australian Securities and Investments Commission revealed that around 44% of small business lacked basic strategic management regarding its financial operations.

An inadequate cash flow or high cash use without strong financial management and planning invariably leads to disaster.

4. Poor Record Keeping

Not preparing adequate business records to enable an understanding of how the business is performing is like trying to drive a car wearing a blindfold.

Good business management means that you can answer the question, “Where are we at today?”

It should go without saying that businesses that do not keep accurate records are not able to answer that issue in any productive way.

Businesses that provide trade services are again especially vulnerable.

The need to be on the job and earning money usually takes precedence over the office work and financial management.

Grant Burchell from Electrodry, one of Australia’s most successful home and commercial cleaning franchise operations says,

“Successful small businesses needs to have clearly defined financial goals and continually understand the progress of their business compared to those goals. Weekly and monthly financial reporting is the only way to achieve this. It’s really easy to get into trouble if you don’t understand what you need to turnover to pay the bills and yourself.”

Documenting your business plan and your financial records and knowing the true state of your business at any time is the only wise foundation for future plans and longevity.

5. Effects of local and global competition

The Internet has brought many opportunities, but it has also brought some very stiff competition from an international market.

This International Market is able, with the click of a mouse, to reach your local consumer base.

One only needs to look and see what smart business like Amazon have done to the local bookstore vendor or what online Pizza ordering has done for the local fish and chip shop.

If your business has strong local and overseas competition, you can find your sales slide; profits fall and the viability of the operation undermined.

None of these are reasons to avoid a business opportunity. But they are reasons for a business to be more thoughtful, more serious, and more strategic in the setup, planning and execution of a new business.

The health and success of small business play an important part in our local economy.

It is small businesses that provide almost 50% of the employment in the private sector and around 35%  of the employment in production and industry.

And so it is vital that the training and provision of resources be made available to small business so that they can succeed.

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