The top 10 reasons small businesses fail – and how to avoid them             

6th July 2021

There are currently more than 2.3 million small businesses in Australia1. Unfortunately, an estimated 20 per cent of new small businesses in Australia will fail in their first year, and up to 60 per cent of start-up businesses will not survive beyond five years of launching. 

To help give your start-up business the best chance of survival, we’ve asked BOQ’s business banking experts for their insights into the top reasons why small businesses fail and how to avoid becoming one of them. 

1. Lack of research 

One of the most common reasons for start-up businesses to fail is that there is no market need for their product or service. So, one of the most important first steps you need to take when you are setting up a business is to conduct research into everything from the existing market, current and future trends in your industry, to who your competitors are, who your target audience is and what will motivate them to do business with you. 


2. Not having a business plan 

“A good business plan can help you get clear on the direction of your business, identify strategies and an action plan for you to achieve your business goals, and help you secure the financial backing you need to start or grow,” said Martin Hoffman, BOQ Business Head of Corporate, Victoria and Western Australia.

Writing a business plan is an important step towards setting up your new business and achieving your business goals. On the flipside, without a plan your business is vulnerable to one of the most common reasons for small businesses to fail – mismanagement. Having a business plan will also help you stay focused and on track.


3. Not having the business funding they need 

Running out of cash or not understanding what costs are involved in setting up and keeping a business running are a common trap for many small business owners. And the reality is that not every small business owner has the capital to cover the costs associated with starting a new business. So, understanding the fixed and variable costs associated with starting your business should be taken into account when you write your business plan.  

Talking to a small business banking expert will help you understand what financial assistance you may need – whether you need to apply for a business loan, equipment finance or find out about government support for small business owners.

Tip: Never forget that ‘cash is king’.  Even profitable businesses fail due to lack of cash flow, so it is important to negotiate across all aspects of your business. Don’t wait too long for your customers to pay for your goods and services, and always try to negotiate payment terms with your suppliers that are consistent with the cash needs and demands of your business.


4. Financial mismanagement  

Aside from not having the business funding you need to start up your business, not understanding how to manage your cash flow or stay on top of all your financial responsibilities as a small business owner can be a recipe for disaster.

Cash management must be a top priority for small business owners because if your cash flow doesn’t balance out, you’ll find yourself in deep water fast. That’s a business risk you want to avoid at all costs.


5. Poor marketing 

Unfortunately, many start-ups think it is a case of ‘build it and they will come’ when it comes to promoting their new business. A thriving small business needs a regular stream of sales and customers – and you need a marketing plan to do that. 

Depending on the nature of your business and who your target audience is, a good marketing strategy will have the right balance when it comes to attracting new customers (acquisition) and building a base of loyal existing customers (retention). 

Striking a balance between ‘traditional’ offline marketing activities (such as advertising, direct mail, letter box drops, local area marketing, posters and flyers, business to business marketing) and digital marketing (including having a website for your business and using social media for business pages to target your audience).  

The good news is that there are a number of ways to market your small business on a budget, but it’s important that you monitor and measure the results to avoid wasting valuable funds.  


6. Not keeping abreast of customer needs or the competition 

Building a loyal customer base requires knowing who your target customers are and how you can connect with them. But it’s also vitally important that you have the measures in place to stay on top of what your customer needs are. If you fail to understand what your customers expect from you (through customer feedback surveys, monitoring and responding to comments on your social media business pages, and simply talking to your customers) you risk losing those loyal customers to your competitors. 

Speaking of competitors, you also need to keep track of what your competitors are up to – because if they do a better job of fulfilling your customers’ needs, you’ll lose business to them. 


7. Failing to adapt  

In small business, as in life, things don’t always go to plan. Whether it’s responding to changing trends within your industry, unexpected events (like the COVID-19 pandemic or natural disasters), the impact of broader economic issues (such as changes to interest rates, government assistance and support), or even changes to your personal situation (due to illness or other challenges), it’s inevitable that your business will face challenges along the way. You may have to pivot away from the wrong product or service, a bad hire or an unfortunate business decision in order to survive. The most important thing in this context is to stay attuned to what is happening inside and outside your business and be ready to respond – quickly! 


8. Growing too quickly 

Not being prepared for your own success can also be a reason to fail. Part of understanding the business risks associated with your start up business is knowing what you will need – for example, in terms of staffing, technology, business funding, supply chain management – to be prepared for your future growth plans.  


9. Failing to hire and retain the right people 

One of the biggest challenges that small business owners face is hiring, managing and retaining staff. Establishing a diverse team with complementary skill sets, the right attitude and values aligned with your business from the start will help you in the long run. It’s really important that you not only attract the right people but create a work culture that makes them want to stay. 


10. Not asking for support 

Given the number of challenges there are to overcome, starting a new business can be both exhilarating and terrifying. So, it’s no wonder that many small business owners feel alone, overwhelmed or on the verge of losing focus and giving up. But there are a lot of places to turn to for help including your accountant or business banking expert, getting access to government support for small business, finding a business mentor or local business-to-business support group to ask for help. Signing up for an online business course or tapping into some of the best business podcasts around is also a good way to learn tips from other small business owners

Ultimately, whether a business fails or succeeds is heavily influenced by its management capability. Setting up and running a business is vastly different to being a good employee. Unfortunately, it’s not uncommon to see new businesses fail even when the owners are familiar with the industry and/ or business that they buy or set up. It’s critical to undertake in-depth research across every aspect of the business to ensure your chances of success are maximised.  

 

Contact us to find out more about how BOQ Business can support your small business

 

1https://www.asbfeo.gov.au/sites/default/files/ASBFEO%20Small%20Business%20Counts%20Dec%202020%20v2.pdf

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