Why is small business failure so high?
It’s no secret that small businesses are the backbone of the Australian economy. In fact, small business employs more than 4.7 million people and 41 per cent of the business workforce in Australia. It’s a staggering number. However, of the 2.3 million small businesses operating in Australia, many will sadly fail.
Breaking down the statistics
A report by the Australian Small Business and Family Enterprise Ombudsman in 2020 shows that over a four year period (June 2015 – June 2019), the average survival rate for a non-employing business was 60 per cent, and 69 per cent for businesses with one to four employees. Those with five to 19 employees had a better chance of success with a 78 per cent survival rate, while those with 20 to 199 employees had an 18 per cent likelihood of failure.
Reasons for failure
Research from the University of Technology Sydney found that financial mismanagement was the largest contributor to small business failure. This included factors like cash flow problems, being undercapitalised when the business launched, overuse of credit, no budgets and inadequate provision for tax payments.
Businesses need to carefully examine a range of metrics to help understand their financial position. These include revenue growth (%), gross margin (%), operating profit (%), revenue to overhead expenses (%), operating cash flow, debt to equity ratio, number of new and returning customers, average sales per customer, return on assets, breakeven point, working capital measures and return on investment. The Australian Taxation Office has a list of benchmarks which you can compare to other businesses in your industry. Once you determine these key metrics, you can gain a greater insight into your business’s financial situation and seek help to improve it, if necessary.
According to Lauren Evans, Director at Inline Partners, a good accounting system is non-negotiable for small businesses. “Xero is perfect for most small businesses,” she says. From invoicing on the spot to keeping track of all of your business receipts, Xero is an easy-to-use cloud-based accounting software platform. For financial reporting, analytics and simple forecasts, Lauren recommends Fathom, Futrli or Spotlight reporting, and for cash flow management, either Float or Calxa.
Lack of planning
Most small business owners believe that once they create a business plan, they can tick it off their to-do list for good. However, business planning is a continuous business activity – and your plan needs to be reviewed and tweaked regularly to ensure you stay on track.
The Australian Government has a great business planning section with a free business planning template for you to download. This will help give your business direction, define your key objectives, and attain finance through investors or banks if you need to.
Using the wrong software tools or none at all!
Depending on your business, entering data and keeping records can take up significant amounts of your precious time, which is why it’s important to invest in the right business software tools to help automate the process for you. From proposal software such as Dubsado, to e-commerce solutions like Shopify, there are range of tools that can help you manage, track and boost your business.
“When choosing business software, it is important to review the software in relation to your specific business needs,” explains Lauren. “Don’t just use what your friend or another business is using because they said it’s good. There are lots of software tools which are specific to industry niches,” she adds. “The niche software is usually more expensive, compared to the broad use type software, but is very tailored to the needs of that niche, so if that’s your market then it could be really powerful.”
Do you need help with your small business? We can help you with bookkeeping, accounting, budgeting andstructuring your business for asset protection and tax minimisation. Contact us