Why do small businesses fail?

 

Small to medium enterprises (SMEs) face significant challenges in today’s global business environment. According to the United States Small Business Administration (SBA), about half of small businesses survive their first five years. In Australia, the numbers are even more challenging, with over 60% of small businesses failing within the first three years. Startups in the United States fare worse, with over 90% failing. Common reasons for failure include cash flow issues, lack of cash, and creating products with no market interest.

Lacking Tools

A recent Australian study by the University of South Australia found that many SMEs fail because CEOs or founders lack clarity about their roles. Many do not have the tools needed for success in starting, sustaining, and maintaining a business. Essential tools include knowledge in leadership, cash flow management, strategy, business planning, and market research—skills often gained in post-graduate business courses like an MBA.

Poor Choices

From personal experience, factors contributing to business failure can include reliance on external suppliers, poor choice of business partners, ineffective planning, growing too quickly, failing to pivot, loss of interest, and lack of focus. While the challenges are significant, understanding and learning from others who have succeeded can ease the journey.

Remember, any business idea you think is unique may have already been attempted. However, that doesn’t mean it cannot succeed. With the right approach, even familiar ideas can find a niche in the market.

               

Before "Googling" Existed: Other Search Engines Dominated the Market In 1996, Larry Page and Sergey Brin, then students at Stanford, developed PageRank and launched Google. The search engine market at the time was dominated by Yahoo, Looksmart, Excite, and Hotbot. Google’s unique approach was to tackle the scaling of web indexing, simplifying navigation to return only relevant results. Google even attempted to sell their business to Excite in 1999. Source: Stanford Infolab

Research: A Crucial First Step

Research is vital in determining if your business idea has a viable market. Studies show that one major reason businesses fail is due to a lack of demand for their product or service. According to Business Insider, over 42% of businesses fail because they lack an audience. Taking the time to validate your idea can make the difference between success and failure.

Globalization and Technology

Globalization and technology have both challenged and empowered SMEs. Large corporations like Amazon, Google, Netflix, and Expedia have disrupted traditional small businesses, but globalization has also allowed adaptable SMEs to thrive. Examples include businesses like Domino’s Pizza, which embraced digital ordering, or Lego, which diversified into mobile games and movies.

SMEs that have adapted to the global market have seen substantial growth. Examples include Australian company Kogan Technologies, which expanded from a garage-based business to a global enterprise listed on the Australian Stock Exchange, and UK company Dyson, which transformed into a multifaceted technology research center.

Setting Out on Your Business Journey

Starting a business, whether aiming to create a major corporation or simply a side hustle, begins with a critical question: Why? Understanding the purpose behind your business idea is essential to navigating challenges and achieving success. Prepare yourself with the necessary tools, knowledge, and resilience to face the inevitable hurdles of the business world.