March 15, 2023
Elephant Advisory

The Five Biggest Reasons for Small Business Failures in Australia

"As a business owner, having the ability to identify and address problems before they become critical offers a significant advantage. In this article, we'll outline the top five reasons behind small business failures, including how to recognise them and what steps are needed to avoid them."

 The Five Biggest Reasons for Small Business Failures in Australia

Amongst the many challenges that face small businesses, the threat of failure is often the biggest source of stress for Australia’s entrepreneurs and business owners. 

The promise of financial independence, flexibility, and the opportunity to pursue a career in your passion is enough to lure the hundreds of thousands of business owners that make the leap each year. Sadly, most businesses won’t get the chance to make it this far. 

Research suggests that approximately 60% of small businesses fail within the first three years, with this number even higher in certain industries such as hospitality and retail. So how can your business avoid this fate?

The good news is that many business failures are preventable. While external challenges like economic conditions, competition and a changing marketplace can play a role, they are not the main contributors to business closures. In fact, internal factors such as poor management and planning are often among the leading causes of a business’s downfall. 

As a business owner, having the ability to identify and address problems before they become critical offers a significant advantage. In this article, we'll outline the top five reasons behind small business failures, including how to recognise them and what steps are needed to avoid them.

1. Poor Cash Flow Management

Poor cash flow management is, without doubt, the most under-appreciated threat facing small businesses. Depending on which research you believe, as much as 80-90% of failed small businesses list inadequate cash flow as a factor in their closure.

Without cash, businesses cannot pay their bills, invest in growth opportunities, or even pay their employees. Unfortunately, many small business owners underestimate the importance of cash flow management, and as a result, they struggle to keep their businesses afloat.

As recently as last week, we witnessed one of the 20 biggest banks in America, Silicon Valley Bank, collapse spectacularly as it was unable to access liquidity to pay its debtors.

Some of the most common cash flow problems include not setting aside enough money for taxes, not keeping track of accounts receivable and accounts payable, and overspending on non-essential items. 

To avoid cash flow problems, it's essential to work with an accountant and forecast your cash flow, taking into account all sources of income and upcoming expenses. Other great cash flow management tips include:

  • Separating your business and personal account
  • Building a sufficient cash reserve
  • Planning your tax and superannuation payments
  • Understanding the difference between cash flow and profit

2. Lack of Business Planning

Starting a business without a plan is like going on a road trip without a map. Sure, you might eventually get to your destination, but you're much more likely to get lost, waste time and resources, and encounter unforeseen challenges along the way.

No matter the size of your enterprise or the industry you operate in, you will always benefit from having a thorough business plan to guide your business journey.

A business plan is essential for defining your company's goals, strategies, and potential challenges. It provides a blueprint for achieving success and helps you stay focused and accountable. 

Your business plan should include your business's mission statement, target market, marketing strategies, financial projections, funding opportunities and more. Remember, your business plan is not set in stone and should be revisited and updated regularly.

3. Poor Management and Leadership

Successful businesses are built on strong leadership. Unfortunately, many small business owners lack the leadership skills necessary to build and grow a successful business, which is why it is one of the leading causes of business failures.

This doesn’t mean you need to possess superhuman management qualities to run your own business, but you do need to be able to make strong decisions, maintain staff morale and take responsibility for the direction of your venture.

Without effective leadership and management skills, your business can run into any number of problems, including operational inefficiencies that eat into your profit margin, high employee turnover and the inability to identify and adapt to the challenges you’ll inevitably face. 

To avoid these problems, small business owners must prioritise effective leadership and management practices, including clear communication, strategic planning, and a focus on employee engagement and development.

4. Inadequate Marketing & Sales

No matter how great your product or service is, if no one knows about it, your business is likely to fail.

As a small business owner, if you don’t know why or when your next customer is coming through the door, you leave yourself at great risk of missing out on crucial revenue.

Marketing is essential for attracting and retaining customers to your business, as well as building awareness of your brand. However, many small business owners either don’t know how or don’t believe they have the resources to market their business effectively.

Luckily, there are many great marketing strategies available to businesses of all sizes and budgets that will help get your name out in the community and encourage existing customers to come back. Examples of these strategies include:

  • Developing or improving your website
  • Getting your brand on social media and engaging with the online community
  • Starting an email marketing campaign to speak directly to current and potential customers
  • Improving your Search Engine Optimisation for better performance on sites like Google
  • Posting blogs, videos or other content to your online platforms
  • Joining local business groups
  • Offering customers incentives to recommend your business to others

The most effective marketing strategies will help you develop a strong brand identity whilst engaging your target audience. 

When it comes to small business marketing, the key is staying consistent and committed. Not every strategy will work so don’t be afraid to experiment with different marketing strategies and track your results to see what’s working best for your business.

5. Insufficient Capital

Starting a business requires capital, and many small business owners underestimate the amount they need to get their businesses off the ground.

Whilst you may factor in the obvious costs such as supplies and rent, other costs such as legal fees, insurance, technologies, permits, and marketing may also be needed to get you off the ground. Without a stable income coming in, these expenses can start to add up and leave you without funds to operate or grow your business.

To avoid running out of money, it's essential to first build up a sufficient cash reserve to protect you from the mountain of different costs that come with starting a business. It is also crucial to develop a realistic budget that takes into account all of your expenses and identifies areas where potential savings can be made. We also recommend sweeping income into a separate savings account for you to access on a rainy day.

Lastly, it's important to have a plan in place for securing funding. Whether that's through loans, grants, or investors, you need to know where you can access capital from in times of need.

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