A university-led research project, billed as being the first-of-its-kind, has asked more than 100 CEOs and business owners about the reasons their previous companies had failed.
The Australian Centre for Business Growth at the University of South Australia Business School reached out to 650 CEOS of small and mid-sized businesses about whether they had ever experienced a business failure. More than one in five (134) responded that they had.
Researchers then asked each of them to explore the reasons the relevant business had collapsed.
Collectively, they offered a staggering 253 reasons for the failure. But the most common reason came down to the skills and inputs of the leaders themselves: one-quarter of the CEOs confessed that a lack of leadership, poor management and/or no proper business planning had contributed to the business failing.
The next most common reason (for 17 per cent) came down to not having enough, or not knowing how to properly manage sales, marketing or market research.
Dr Jana Matthews, director of the Centre, said that the major theme identified when speaking with business leaders who had suffered previous failures was them not understanding their roles and responsibilities in running a company.
“Leaders need to plan and set the company’s direction, communicate, build an executive team, create a high-performance culture of execution, manage and optimise corporate resources – including employees and financial resources, customers, suppliers, vendors, advisers and financiers,” Dr Matthews said.
“They need to ensure good governance and alignment, and create a learning organisation, and when these leaders do not understand or fulfil such responsibilities, companies fail to grow and, sometimes, fail completely.
“Too many of Australia’s companies are failing because CEOs or founders simply do not understand their job and don’t know what to do, when, or why.”
Dr Matthews said that, thankfully, this is a problem that can be addressed through providing business leaders with the opportunity to learn and develop the skills they need to keep a business viable.
“People are not born knowing how to drive a car, yet millions have learned. People are not born knowing how to drive company growth, but hundreds of CEOs who have gone through our business growth programs have learned – and many more can learn, if they are given that opportunity,” she said.
ASIC recently revealed what it sees as the primary reasons for business insolvencies, with cash flow problems contributing to almost half of all company failures – with management problems a close second.
Top reasons for SME failure
- Insufficient leadership and management (13 per cent) or planning and execution (12 per cent) – 25 per cent
- Inadequate market research, marketing, sales – 17 per cent
- Poor financial management – 14 per cent
- Underestimating the impact of externalities – 13 per cent
- Poor governance structures re partners, family – 11 per cent
- Product or service problems – 7 per cent
- Poor management of people – 6 per cent
- Inexperienced CEO – 4 per cent
- Wrong strategy or poor implementation – 3 per cent
Source: The Australian Centre for Business Growth at the University of South Australia’s Business School (2014 – 2018)
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.