Why do small businesses fail?

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SMEs face significant challenges in a modern global business world.  The United States Small Business Administration (SBA) Office states that around half of small businesses survive the first five years.  In Australia, these figures are even poorer, with over 60% of small business failing within the first three years (reference).  Startups in the United States have an even poorer record, with over 90% failing.  There are a multitude of reasons why SMEs fail, many of which are common across global businesses.  In the United States, cashflow issues, a lack of cash and creating a product with no interest are common reasons for business failure. Similarly, in Australia, key reasons for SME business failure include poor leadership and management, inaccurate market research and poor financial management.

Lacking tools
In a recent Australian study undertaken by the University of South Australia, SMEs are failing due to most CEOs or founders not having a clear idea of what is associated with their job role.  CEOs lack the tools required to be successful in starting, sustaining and maintaining a small business.  Tools such as the knowledge associated with leadership and management, cash flow management, strategy, business planning and market research are all common reasons why businesses fail. This knowledge can be directly gained by any individual and is commonly included in post-graduate business courses, such as an MBA. 

Poor choices
In my own experience some factors that contributed to business failure included reliance on external suppliers, poor choice of business partners, ineffective planning, growing too quickly, failing to pivot quick enough, loss of interest and lack of focus.  The challenges that SMEs face are significant, but starting from the bottom run of the ladder can be made easier with an understanding of the knowledge used by others who have been there in the past and successfully navigated through each and every hurdle faced.  Remember as an individual, you are one of over six billion humans on this planet.  In essence, any business you believe may have relevance to the global society and may be new, unique or innovative may either have already been thought of, may already be operating or may just not be needed.  That doesn’t mean it cannot succeed.

Before Searching the Internet was called “Googling”, other Search Engines Dominated the market, yet they all failed.

In 1996, Larry Page and Sergey Brin both students at Stanford University, developed PageRank, and launched the Search Engine Google.  It wasn’t a completely unique concept, it was a search engine.  The search market place in the late ‘90s was dominated by businesses such as Yahoo, Looksmart, Excite and Hotbot.  What was unique about the approach they both took was tacking the problem of scaling indexing of the web.  Their approach looked at how they could improve search engines in the marketplace at the time through simplifying the navigation process using search to only return relevant results.  PageRank is what would bring order to the web and search and was classified as “A model of user behavior”.  Google in fact tried to sell their business to Excite in 1999.

Source: http://infolab.stanford.edu/~backrub/google.html

Research Research Research
Research plays a pivotal role in ascertaining from commencement whether or not you are onto an idea that will actually transition into a successful enterprise.  An alarming fact discussed in the two previous studies mentioned is that a significant reason for businesses failing is purely based on the concept behind the business having no audience.  The Business Insider reported that over 42% of businesses fail based on concluding that there was in fact a deficient need for their product or service. With a wealth of information readily available on line, the simple step of asking yourself why and researching whether the why is actually viable in a global environment could be the difference between financial and personal joy and sorrow. 

Globalization and technology
Globalization and technology as a marriage has played a major part in the demise of SMEs across the globe.  With the ability to trade in almost any location, the large corporate conglomerates have in essence swayed a trail of destruction through the former traditional small business stranglehold on economies.  The likes of Amazon, Google, Netflix and Expedia have all played their part in the demise of the traditional shopfront.  But will globalization in this technology age still have the same stranglehold on SMEs who have sought the a wave of tools to enter the new world and executed innovative strategies, and sought out opportunities as they have emerged? It is these small businesses who have been able to adapt and stay relevant in a global world, and the rewards have been fruitful.  Think of businesses that have adapted and switched to a digital business model such as Domino’s Pizza ordering systems or Lego’s diversification into mobile games and movies.  Think of businesses that were once SMEs such as Atlassian or Xero, that have been able to embrace globalization and the opportunities it has presented.

It is also those new market entrants, those who identified their place in the market, their niche, their opportunity who have found the opportunity to become relevant and excel in the modern business world.  Think of agile US publisher Chicken Soup for the Soul, who increased their distribution dramatically by sourcing international partners.  In Australia Kogan Technologies, who started in a garage in 2006 selling computers locally to using digital marketing and distribution channels to expand their business globally, listing on the Australian Stock Exchange in 2016.  The UK company Dyson, has transformed from an innovative best of breed vacuum cleaner manufacturer to a multifaceted technology research center seeking through innovation to find a plethora of relevant future technology-based consumer solutions. 

It’s not hard, but as an individual setting out on your business journey, you need to ensure you come prepared with the tools required to effectively undertake your business journey and you are ready for the expected challenges you will face from day one through to achieving your business objectives.  You may or may not be setting out to create the next billion-dollar juggernaut, it may be a local philanthropic initiative or purely a side hustle.  But before you create that new digital product, or next homemade Etsy product, or seek out investors or tell your friends about it, stop and think about it.  Whatever you want to achieve with your new business or whatever addition you wish to make to your current business; it all commences with what appears to be the simplest of questions.  Why?

Watch the below Ted Talk discussing SME business failure.