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When it comes to what makes a small business succeed or fail, the statistics paint a compelling picture of where businesses typically go wrong. Business accounting expert, Kris Dieckmann, took a deep-dive into the most recent Australian business statistics – here’s what he found.
Defining a small business
Let’s start off with discussing the accurate terminology for a ‘small business’ in Australia. What makes a business ‘small’?
Well, a small business is defined by a business with no more than 20 employees, in terms of looking at it from an employee perspective. This includes sole proprietorships as well as partnerships, micro businesses (which is a business with 1-4 employees) and other small businesses with 5-20 employees.
A small business can also be defined in monetary terms by the revenue generated annually, which is between $2 million and $10 million per annum.
So, if your business applies to any of the definitions above, it’s time to chime in!
Image credit: Wiseman Accountants
Key statistics for small business in Australia
Although small businesses often feel as though they can’t catch a break between COVID-19, competing with the big companies and trying to get their brand noticed, they definitely aren’t the minority within the business world.
Small businesses make up 97 per cent of the total businesses currently set up in Australia. They contribute 32 per cent to Australia’s total GDP (Gross Domestic Product) – which is around $418 billion dollars – making small businesses a major economic contribution.
As of 2019, the construction industry is the largest small business employer followed by the professional, scientific and technical services sectors. The age bracket of 45-59 currently dominates, owning 40 per cent of the small business sector.
A study conducted by McCrindle found that out of all the new companies that launched four years ago, 46 per cent have closed their doors in the years following. As well as the two million businesses in operation in Australia four years ago, one in three (36 per cent) have closed down permanently.
Australia is currently the second best country for social entrepreneurship, with the main reason for starting a business being to acquire wealth.
So, with that being said, let’s jump into what aspects affect a small business for it to become unsuccessful.
Where did unsuccessful businesses go wrong?
Firstly, we are going to take a look at where small businesses went wrong and the reasoning behind their failures. In our analysis, we focused on contemporary small business statistics focusing on whether topics such as age, marketing, capital and other various factors are relevant to a successful or doomed small business.
It’s important to note that 60 per cent of start up businesses will fail in the first three years and of those, 50 per cent are profitable. So, I think it’s safe to say it’s a hard gig out there and Australia has a very high failure rate within the small business sector.
A study completed by Fundsquire shows the following factors were the largest contribution to unsuccessful businesses:
- no market need for their products or services
- they run out of cash
- they don’t have the right team running the business
- they were outcompeted
- pricing and costs issues
- poor product offerings
- lacked a business model
- poor marketing
- they ignored their customers
Another study by Open Colleges found that financial management was also a large contributor to failing businesses, which also included a lack of business experience, cash flow issues, not starting with enough capital, a lack of budget framework and overuse of credit. They established that 11 per cent of small business fail because of marketing problems which include insufficient advertising and poor promotion.
On top of this, small business owners report that they spend an average of 12 days per year chasing unpaid invoices which puts small businesses under more financial strain. JMA Credit Control explains that 27 per cent of small businesses that don’t insist on upfront payments have been forced to take loans or use credit to pay suppliers and wages.
Image credit: Wiseman Accountants
What makes a small business successful
So now that we’ve laid out the alarming facts that will often crush small businesses, let’s discuss how we avoid and overcome these issues.
To start off on a positive note, it’s important to acknowledge that micro and small businesses are more likely than large businesses to innovate and bring new goods and services to the market, which is why each small business has their own unique ‘difference’.
After finding that one of the main reasons for small business fail is that there is no market need for their services, we looked into the most profitable startup businesses, which are:
- eCommerce
- Chrome extensions
- Mobile apps
- Enterprise Saas (software as a service)
- SMB Saas
This isn’t to say that other startup businesses won’t succeed; it also comes down to how unsuccessful businesses were measuring their success, or if they were at all.
Nine Advisory recently conducted research into how to measure small businesses’ success and the best ways to do so. They found that 58 per cent of SMEs (small and medium enterprises) said financial management was a key success metric. They also found that 56 per cent of SMEs reported that positive word of mouth was a measure of success.
Nine Advisory work on the ‘Nine Pillars of Success’ that they advocate for small businesses to incorporate. It is a framework designed to look beyond the simple small business accounting. Instead of just working around profitability as a success measure, the nine pillars focus on building a high-performance and high-growth business to be successful on every level.
The nine pillars include:
- Governance and compliance
- Product and customer
- People and partnerships
- Marketing
- Sales
- Reporting
- Information technology
- Business processes
- Leadership and management
Top tips to create a successful business
With the economy forever changing, new policies coming into play every couple of years. And with the odd global pandemic striking the world, it is safe to say that businesses small, medium or large need to prepare for the future. It is now more important to plan for a broad range of future possibilities that your business could experience.
These are my top tips for business owners:
1. Define your purpose
Define your purpose as a business and commit to it, making sure that there is a need for your service and product in your market industry.
2. Analyse
Make sure you are meeting the needs of your customers’ expectations, as this was a main factor into why small business failed. Alongside this, you need to analyse a strategic business model that works efficiently and correctly,
3. Build the best team
A strong integrated team can make a huge impact. Do thorough research into each role needed to properly run your business. It’s also worth exploring different options on what employees will suit those roles best.
4. Cash flow
An important component that every business will need to consider (especially startups) is having sufficient funds to operate the business. As well as keep it alive for the lifespan that the business owners expect it to last for.
5. Market research
This research involves collecting data around your target demographic and consumers so that businesses can market themselves better within the industry. Market research is something that all business owners, no matter how small or big, should undertake; it is a vital part of creating a strategic business model.
After analysing small business statistics relevant to Australia, it is obvious that it is no easy job to start a small successful business and manage it without running into financial troubles or other various factors. The statistics show there is less than a 50 per cent chance of success rate for small businesses to still be running after three years. This unfortunately diminishes business owners’ dreams in starting businesses, solely because they can’t afford to take the risks of running into trouble.
If you have the next big business idea, think twice before throwing yourself into the deep end for all of it to come to an end in three years – plan, strategise and conquer!
This article originally appeared at Wiseman Accountants and is republished with permission.
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Avoid business failure: 4 ways to reduce your risk in uncertain times
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