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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.

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