The Fine Line between Business Failure and Business Success

Chris Foster

The results of a major research study into small/medium enterprises were recently released which provide an interesting insight as to the reasons for and impact of business failures.

The study was conducted among 1018 business owners or business decision makers of organisations of 200 employees or less.

The study also was conducted among 212 accountants or principals of accounting firms servicing small and medium enterprises.

The study was commissioned for CCH Australia and the results released in April 2013.

A number of questions were raised with both the SME enterprises as well as accountants to that business sector. ┬áLet’s have a look at some of the results:

Reasons Why Businesses Fail

The 3 major reasons, according to SME owners and managers, were as follows:

  • Failure to manage costs/anticipate rising costs
  • Inexperienced management
  • Poorly designed business model

On the other hand, accountants listed the major reasons as:

  • Poorly designed business model (e.g. no business plan)
  • Inexperienced management
  • Insufficient capital

There is a remarkable similarity between the two groups – I would suggest that although SME owners and managers have ranked failure to manage costs as the major reason, this really is a symptom of a non existent or deficient business plan and inexperienced management. The main take home here is that you can be good at the things your business does however your chances of failure are great if you have poor management skills to go with it. This is the message of that book which is compulsory reading for all business owners, The E Myth, by Michael Gerber – read it if you haven’t as yet!

Another interesting observation from the study was that 66% of SMEs believe that businesses often fail for reasons out of the owners control. I see this as a major issue for business owners – most financial problems are caused by poor management decisions or internal factors rather than external factors – and that is a fact!

The Cost of Business Failure

SMEs ranked the financial cost to the owner as being the biggest cost, closely followed by the financial cost to staff, including losses of wages, entitlements and superannuation.

Further, the emotional cost to the owners and family and financial cost to creditors and suppliers were also indicated as major costs.

It is quite common to see relationship breakdowns which have been caused by financial challenges experienced in the family business

When Are Businesses Most at Risk

SMEs indicated that they believed that a business was most at risk between the first and second year after commencement. Accountants, on the other hand, believe that period of greatest risk is in the first six to 12 months.

On a case by case basis, the quality of management and business model pursued by a business will determine the most likely timing of any adverse risks a business may face. In most cases, it will be deficiencies in these two areas that have been the reasons a business has been started with insufficient financial resources, resulting in a substantial increase in risk of failure.

Is Business Failure a Necessary Stepping Stone to Success?

66% of SMEs believe that business failure can be an important stepping stone to future business success. I would agree to this providing the owner/manager has learnt valuable lessons from the failure.

Who Do SMEs Trust as Professional Advisers?

Reassuringly, 82% of SMEs agreed that their accountant is their trusted adviser, not only for financial accounts but also for advice on continued success and growth of their business.

On the other hand, 70% of SMEs trust their own instincts over the advice of their accountant or other professional. In a way, this is not surprising due to the entrepreneurial nature of SMEs.

What Does This Mean?

We recognised this need to be your “Trusted Adviser” many years ago and have invested significant resources in providing the education and tools to our team of advisers so they are well placed to meet this need. We have also established a wide network of referral specialists that we can call in to assist when needed. Be assured, we want to work in partnership with you to ensure success in your business!

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