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PKF Australia

Accountants and Business Advisers

Why Small Businesses Fail

Why Small Businesses Fail

Posted 07 Jun 13

Despite the wealth of resources available to managers and owners, deficiencies in management skills, and a lack of experience remain as the primary reasons causing small businesses to fail. When this is coupled with an inability to respond and adapt to change, inadequate working capital, or a lack of financial controls and timely accounting information, this often spells disaster for businesses.

The approach by business owners to strategic, operational, and commercial facets of business are critical in ensuring long term survival. The most common characteristics I find when examining businesses in financial distress:

Strategic

  • Absence of a business plan setting out step by step processes.
  • Lack of sufficient insurances. Could the business survive if a key person suddenly passed away?
  • Inadequate R&D into products and potential markets.

Operational

  • Unbalanced ownership structure or poor alignment between duties and goals.
  • Poor communication.
  • Ineffective delegation and supervision.
  • Failure to address operational issues.

Commercial

  • Ineffective marketing mix including product image, pricing policy, target market, promotion and/or distribution.
  • Inadequate liquidity or insufficient working capital.
  • Lack of proper records.
  • Untimely and/or inaccurate financial data.
  • Poor product design and reliability.

What are the warning signs?

  • Late payments
  • Broken promises, lack of communication or mixed messages
  • Material transactions affecting a debtor, e.g. failure of a large debtor, cancellation of a contract, sustained strike action
  • Unfavourable legal judgements or legal actions of a material size
  • Forced or untimely disposal of assets
  • Arrangements with creditors
  • "Bounced" cheques or post-dated cheques
  • Lack of financial planning and controls
  • Highly geared business ventures 
  • Playing suppliers off against one another for credit 
  • Making poor investment decisions
  • Unpaid Commonwealth and State taxes and/or superannuation

Insolvent trading is a very serious issue that can lead to personal liability for company directors. While some businesses attempt to trade out of trouble, acting early and getting the right advice is often the key for the future survival of your business, and it may limit the exposure to your personal financial position.


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