So why do so many businesses fail?

There’s more to it than “the economy”

You will know a business, and probably a few, that have failed.   Sometimes that is due to economic conditions, and there is no doubt our economies have been going through a quiet time over the last few years.

Dun and Bradstreet report, in Australia, that the number of business failures in the third quarter of 2016 rose by 11% compared to the same period last year, and was up 42% on the previous quarter.

Quiet economic times leads to both businesses and consumers being cautious with their spending.  Having said that, I’ve always been amazed at the number of small businesses that don’t keep a beady eye on what is happening in their market place.  They will certainly listen to the gossip of their competitors and other traders around them, but making a regular study of their marketplace, and what the trends are, is done rarely.

According to the Australian Bureau of Statistics, more than 60 percent of small businesses cease operating within the first three years of starting. 

But why is it so?

There’s more to it than the economy.  As Ben Fewtrell from Action Plan ANZ says “So why do so many businesses fail?   Simple… they never learn the basics of how to build and run a business.”  I interviewed Ben last year, and you can see the interview here.  

Despite the gross exaggerations, research reveals just 1.5 per cent of Australian businesses close within their first year.    The problems start in the second or third year, when they start to grow.  There are some common reasons.

One of the most common reasons I have come across repeatedly over the last twenty eight years is the one Ben mentioned; “they never learn the basics of how to build and run a business.”  So many businesses are started by people who have developed a good technical skill; it may be as an IT tech, or through a trade, or as an engineer, a vet, or whatever. 

The problem is that, while they were doing their apprenticeship, degree and working in their industry, no-one training them suggested they might need to also develop business management skills, learn to read and understand financial statements, or how to market - the basics of how to build and run a business.

Five fundamentals required to run a business were suggested by Dr. Greg Chapman, from Empower Business Solutions:

1. A Business Plan to drive your business growth

2. A Marketing Strategy producing predicable & controllable streams of enquiries

3. A Business Management System that turns your business into a profit machine

4. Motivation to get the most from people within your business &

5. Owner Accountability and discipline with a business that’s run by reports.

If you want to have a business, and not just a job, you will need to work “on” your business using these five fundamentals, and not just “in” your business.  Those people who build their business on their technical skills alone, tend to only work in their business, on the tools.  They just have a job, and will never have a business. 

Equally, when the tough times come, they are the ones most likely to fail.

Greg Hayes from Hayes Knight Accountants & Advisers suggests there are varied reasons why most Australian small businesses struggle to survive.

“One of the key reasons is that many small businesses start with a bad idea -- an idea that was never going to work. But the biggest reason for failure is a lack of capital. It’s a common story that many people go into business under-capitalised and they just run out of money,”

When businesses start with a bad idea, it’s usually the owner wants to “do what they do”, without looking at the market for “what they do”. 

As Ryan Deiss puts it, “No amount of work or luck will help if you don’t have a willing and able market.  If there is not a sustainable market for your products and services, all the time you invest in building your business is a complete waste of time.”

And if it’s a market that is so crowded, where every product or service is virtually the same, interchangeable with the competition than it’s “commodity hell”.  The only way to get ahead is to slash prices until the pain of profit loss squeezes either you or those competitors out of the business.  As Greg Hayes says, you just run out of money.

Now these figures are a bit dated, but they confirm what I’m saying.  A 2011-12 report into corporate insolvencies by the Australian Securities and Investments Commission found:

•    44 per cent suffered poor strategic management

•    40 per cent fell victim to inadequate cash flow or high cash use

•    33 per cent went under because of trading losses

You don’t have to fail, or just wing it, trying to learn it as you go along.  People whose businesses fail have no-one who has shown them how to run a business.

You don’t have to fail, or wing it!

When clients approach me for coaching, so often, they are not getting the clients they need, the right clients.  Eight times out of ten this comes down to not knowing what is working, and what is not working, and how to develop that WOW factor that makes them different.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand:

•    The strengths, weaknesses opportunities and threats of their business

•    Determine where they want to be – clear, achievable goals, and

•    How they are going to get there – their strategies to achieve their goals

This is sometimes known as the NOW – WHERE – HOW model.

If you would like to discuss with me how you might do that, book a Strategy Consult here.  There is no charge, it's my gift to you.

© Copyright 2017 Adam Gordon, The Profits Leak Detective 

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