Why do Businesses Fail?

Recent research has shown that, despite beliefs to the contrary, most businesses don’t fail in their first year of business but in the years that follow.  A recent report published via ASIC, show that the percentage of  small businesses failing is on the rise, with owners struggling with issues such as cash flow, strategic planning and record keeping. Research shows that 51% of business start ups do not survive beyond four years of operation.

Some of the major primary causes of failure were poor strategic management, inadequate cash flow or high cash use, with many admitting that they are not keeping good records.

The following are some of the most common reasons a Business would fail in Australia:

  1. Poor business planning. Business aims change monthly, weekly and even daily. Entrepreneurs need to be adaptable and update their business plans regularly. Working on the business means building a plan and strategy for the direction of the business. A lot of people never do it and keep working year in and year out without a plan or a vision of what they can achieve.
  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. 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 start-up. An inadequate cash flow or high cash use without strong financial management and planning invariably leads to disaster.
  4. Poor record keeping. 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. It’s important to know how your business is performing. Successful small businesses need 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 bills and yourself.

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. If you struggle with any of these areas in your business seek the help you need either from a business strategist, financial planner, accountant or bookkeeper. Don’t keep trying to muddle through on your own.

The challenge faced by most business owners is understanding the market conditions for their industry and working out appropriate strategies to combat the areas which are not favourable to their business. Remember, it is just a matter of understanding your area of expertise and adapting to change no matter what the circumstances may be.

Disclaimer: The advice contained in Balance Books blogs and newsletters is of a general nature only and may not apply to your individual business circumstances.  For specific advice relating to your situation, please contact your Accountant or other professional adviser to discuss further.

Sally Hams

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Email: accounts@balancebooks.com.au

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