Becoming more profitable

5 reasons small businesses fail

And how to avoid them

Failure won’t be on many people's minds when they launch a business. However, entrepreneurship is inherently risky and it’s always worth keeping an eye on the warning signs. 

30 November 2022

As of 30 June 2022, there were 2,569,900 actively trading businesses in the Australian economy, according to the most recent ABS statistics.  

In 2021–22 there was a 19.7% entry rate (472,731 entries) and a 12.7% exit rate (305,085 exits). 

Unfortunately, an estimated 20% of new small businesses in Australia will fail in their first year, and up to 60% of start-up businesses will not survive beyond five years of launching, according to the ASBFEO (Australian Small Business and Family Ombudsman).  

Of all the new businesses started four years ago, almost half (46%) are no longer operating, highlighting the tough business environment. Of the more than 2 million businesses operating in Australia four years ago, one in three no longer exists (36%). 

Chris Mooney, My Business Consultant and Entrepreneurship Facilitator, says there are many reasons why businesses may not succeed and it is necessary to understand how each obstacle can be managed or avoided altogether.  

Successful business owners must possess the ability to mitigate company-specific risks while simultaneously bringing a product or service to market that meets customer demands.  

1. Security of income 

A primary reason why small businesses fail is a lack of funding or working capital, according to Mr Mooney.  

Running out of money is a small business’s biggest risk. Owners often know what funds are needed from day to day but are unclear as to how much revenue is being generated, leading to poor cash flow management.  

“People come in thinking they’re going to start a business without a job and don’t understand that it takes two to three years to build a positive income,” he says.  

Business owners should first create a realistic budget for company operations and be prepared to provide some capital from their own funds. They should also have a job on the side during the launch or expansion period to help manage financial obstacles. 

2. Security of enthusiasm 

Mr Mooney said there are two balancing attributes that define an entrepreneur’s ability to succeed in a business.  

It’s easy to be passionate about the business but it’s also important to have the knowledge and expertise to sustain it. 

“You also shouldn’t turn something you love into a company just because you love it,” says Mr Mooney. “Businesses fail all too frequently because the entrepreneur believes that others share their passion.” 

Entrepreneurs frequently become enthused about new concepts but are unable to tell whether they represent “real prospects” as opposed to merely “interesting ideas”. Or, they have a brilliant idea but are unable to implement it. 

“Before selecting whether to pursue an idea, it will be crucial to compare it to your business plan and vision. You should also ask yourself, ‘Do I have the time, skills, and resources to implement this?’” 

3. Lack of market research  

One of the most common reasons for start-up businesses to fail is that there is no demand for their product or service. 

Mr Mooney says the best business ideas will fail if there isn’t a market for what you sell, or if the market suddenly disappears because of economic changes or natural disasters. 

“Many businesses have not done any market segmentation and haven't identified what customers they’re going to sell to,” he says. 

The first step entrepreneurs need to take when setting up a business is to conduct research into everything from the existing market and current and future trends in the industry to who the competitors are, who the target customer base will be, and what will motivate them to do business with you. 

Market research eventually turns into a great value proposition and the most successful businesses deliver the most value.  

4. Not understanding your industry and poor marketing 

Building a loyal customer base requires knowing who your target customers are and how you can connect with them, according to Mr Mooney. But it’s also vital you have the measures in place to stay on top of what your customers' needs are.  

“Another reason why businesses don’t succeed is the failure to build a network or connections that enable them to substantiate their value proposition and reach their customers,” Mr Mooney says. 

Business owners need to keep tabs on their market and their customers’ changing needs on an ongoing basis. Certain industries require more innovation, while others may have different product life cycles.  

A good marketing strategy will strike the right balance between acquiring new customers and establishing a base of devoted existing customers, depending on the nature of your business and who your target audience is. 

5. Planning with vision   

Often people believe that if they’ve got a business plan, they can build a plan to succeed. However, what precedes the business plan is also a vision, according to Mr Mooney. 

It takes a high-velocity, high-leverage attitude for entrepreneurs to navigate the constantly shifting business waters, but having a business plan with a vision can help entrepreneurs grow and handle key phases of the business cycle.  

“You don’t want to have a business plan without vision. Small businesses need to think about where they want to be two to three years from now,” Mr Mooney says. 

“Before operations begin, business owners who do not address the demands of the business through a carefully thought-out plan are putting their organisations at risk.”  

Similar to this, a company that does not periodically examine its initial business strategy or that is not equipped to adjust to market or industry developments may eventually run into insurmountable challenges.          

“You need to put enough time and effort into making sure you have chosen the right course of action, the right area of interest, and that it’s commercially viable. With time and effort, you can then make this into a successful income-earning business."  

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