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Why small businesses fail in Australia

head under water

In a world doomed by economic downturn, the first to be impacted are small businesses.

More often than not, SMBs struggle to survive and have a hard time picking up the pieces. The tragedy here is some businesses don’t even know what hit them. Is it really the economic crisis though or poor management and not understanding the factors that help a business survive?

The Australian Bureau of Statistics revealed that 42 percent of small businesses failed between 2003 to 2007 and more than 30 percent since 2008. Furthermore, 1,095 Australian businesses were placed into insolvency or external administration in  March 2009 and a whopping 1,123 businesses in February 2012, as reported by ASIC.

A simple math will tell you the dramatic increase of small business failures in Australia has been massive.

Reasons why small businesses in Australia fail

There are several reasons why small businesses don’t survive. It is not only because of the global economic crisis.

Several studies and data proved that there are other underlying factors why almost 60 percent of small businesses fail during the first three years of management.

• Lack of experience

Without a doubt, this is one of the most prevalent reasons why a small business fails during its first year of operation. Coupled with poor planning and mediocre business analysis, business owners with lack of experience are unlikely to succeed. The situation will be even worse if your business is under capitalised.  When one of these factors fails, everything will go under.

• Poor location

This is another death warrant considering that small businesses depend on walk by traffic. Hence, small businesses that are not located in high traffic or populated areas like malls or city centres have a higher chance of declaring bankruptcy than those that have higher visibility to the public.

• Poor financial control

In 2010, external administrator reports reveal that 33 percent of business failures are due to poor financial control. Mishandling of finance for small business and poor credit arrangements trigger monetary difficulties rapidly especially if sales figures are lower than anticipated.

• Ineffective strategic management

Another reason why small businesses fail is poor strategic management. In fact, it is the highest cause of business breakdown with 43 percent according to external administrator reports.

• Cash flow planning

Several researches show that improper cash flow planning is one of the leading grounds on why small businesses fall short not only in Australia but also in United States. In fact, 68 percent of 2,200 small businesses studied ended up insolvent because of bad cash flow analysis.

The challenge faced by most business owners are understanding the foreseeable market conditions and devising appropriate strategies to combat those areas which are unfavourable to their business.

Remember, it is just a matter of understanding your industry and adapting to change no matter what the circumstances may be.

  • Frederick46M

    Small businesses such as industrial production are suffering in the world and in Australia also, consumption is down and no one has money. Our administrators really should listen to specialists in the economic crisis who are able to face the numerous problems due to the crisis, like the specialists from the Orlando Bisegna Index who have solved problems of unemployment, family purchasing power, public finances for counties in financial distress, avoiding further debt and default.

  • David Smith

    Although I partly agree with most of the things mentioned. I have to say with the location factor, there is ample opportunity for businesses willing to embrace the online World to gain some traction.

    For instance, a company that is selling bedroom furniture as an example, may find that all of their business is finding them in their local area which was fine when they were the only store in the area. But once a rival store setups shop within a few miles. People may now decide to check both stores.

    So they can take advantage of the rise of people using the Internet to find local businesses. So anyone searching for “bedroom furniture” + ‘location’ will be given an opportunity to look online or get directions to the local store.

    So although I agree that there will be some businesses which will be too out of town for people to travel to. With the ease of being found online with things like local business directories such as yellow pages type websites, yelp, Google+ local, Bing for Business, etc. Small Business owners really could do a lot more to market themselves cheaply and effectively.

  • Barry Smith

    How about from an economical perspective prosecute the government and corporate officials responsible for the GFC… yep they get away with it and while working for Bush are reappointed under Obama’s government! THIS IS THE PROBLEM, CRUSH THE CATALYST TO THE GFC!

  • Ira Smith

    Excellent blog and thank you for the information. Unfortunately, the failure of SMB’s and the reasons are not limited only to Australia. SMB owners have to be skilled at many things, especially knowing what they need to succeed, knowing they do not possess all of the necessary skills and retaining quality suppliers to provide management with the expertise that doesn’t reside in-house.

  • Kirsten Clark

    In order for a small business to survive, it must take a detailed look at it’s cash flow. This takes time but it’s well worth setting up an Excel spreadsheet and entering projected amounts for 6 to 12 months in the future. Then each month, track your actual cash flow and continually adjust the projected amounts. This will help focus attention on how cash in the business is being used and allows the business to make adjustments along the way.

  • Madanlal Uppal

    Each country has to understand the importance of small and medium businesses.A solid base/platform which is provided by these units, is imperative to build competitive manufacturing industry or distribution channels , depending upon the need of that country.Day by day the SMB business will be more demanding and successful marathon runners will need lot of skills , planning , technology and mentoring to survive.Special support in the initial stages is also needed.

  • Tim Greig

    I have to agree with the number one reason, That is, lack of experience. And if you mean by “poor planning” that the business idea was completely stupid in the first place then I would agree with that also. So many businesses I see pop up seem to be the owner’s idea of, 1) buying a job or 2) “what I want” rather than what other people want. Having said that I would seriously question these statistics. Why? Because many businesses are registered but never actually start and hence the reason for the perception that x number of business fail in the first three years. Guess how long business name registration lasts? One or three years, depending on which option you choose. So, if you come up with a ‘great’ business idea, register but never do anything then, in on or three years your business has ‘failed”

  • Shae Marshall-Rae

    I’d really like to know where all the failed business owners are?

    Personally, after losing two franchises for a big brand after almost 2 years of ownership (at 27 years old and a female), I found out in very clear detail exactly where I went wrong. I am now in a position where I am planning to get back on the horse (this time with no credit or security, but a whole lot more determination!), but my plan involves finding more stats on demographics of the people behind the general business failure statistics, and actually finding out what these people do with themselves… are there any fellow failed business owners out there?

  • venture capital

    Oh,It’s bad luck!!! Now,you need to consult with any good business consultant in Australia.

  • David B

    I have been talking to business owners on a regular basis for the last 12 months and a lot are under the pump as soon as you borrow large sums of money to finance your business. If you have a business that relies on day to day traffic, eg a coffee shop or a dress shop etc, as soon as there is an economic downturn, yours is the first to be impacted. My business increases when there is down turn simply because I have no overheads, no staff, no rent and very little capital outlay. The main thing , no stress. Also, if you have products and services that are vital to everyday living and not a luxury, I think you will be lot better off.

  • Scott Middleton

    I’d argue the number one reason businesses fail is lack of sales. You can analyse cash flow all you like, but if nobody is buying it won’t matter. Similarly, a lack of experience can be made up for with lots of sales.

  • event based monitoring

    a decision-making is one of the important factor that every business owners must feel a lot more confident.

  • Lincoln Portbury

    Economical Perspective and Poor Financial Control is the main reason for small businesses fail in Australia.