Why businesses fail

From

Data from Westpac indicates that 53% of small to medium-sized enterprises (SME) fail within the first 3 years.

Research suggests that 66% of business collapse is due to financial difficulties associated with poor financial management. According to Dun & Bradstreet reports, “Businesses with fewer than 20 employees have only a 37% chance of surviving four years (of business) and only a 9% chance of surviving 10 years.” 

At any measure even the more optimistic estimates make for very sobering feeling. It is estimated only 90 in 1000 business survive. 

Key reasons for business failures

  • failure to Plan. This refers to the failure to plan in regards to a marketing plan as well as business plan – includes the use of “SMART” goals
  • lack of appropriate managements skill
  • lack of adequate financial capital
  • lack of knowledge capitalisation
  • refusal to seek professional help
  • not managing cashflow –  inventory is not cash – profit is not cash
  • resort to discounting
  • operations not efficient
  • failure to embrace technology and new trends
  • lack of business succession plan

Business financial literacy
 Literacy, language and numeracy are often seen as “core” or foundations skills for society. The industry Skills Council of Australia states that “53% of working age Australians have problems have difficulty with numeracy skills.”

A commercial subset of these are Business and Financial literacy. These latter two types of literacy, or the lack thereof, are considered one of the biggest impediments to the success of new small business start-ups. The sobering statistics on failure rates of new business launches have been documented in a myriad of research and comments from academics and business commentators alike.

On the highest scale, the effects of this can be far reaching. The results can be anywhere from “serious”, to having a material impact on National prosperity and well-being. The associated loss in productivity can be traced to a direct effect on National GDP, wealth and wellness in their populations. The reality of the situation is borne out similarly across the international financial playing field as well with similar impact figures being registered across most of the economically developed countries.
 
This indicates a powerful connection between financial literacy and demographic/socio-economic factors. Studies show the existence of behavioural variation amongst groups whose financial literacy score was in the top 20% of the population and those below that percentile.
 
People in the top group were more likely to use a wider range of financial information sources and retrieve advice from various windows of information such as financial publications, financial web-sites and seminars as opposed to 38% of the lowest group. This result was very similar when it came to obtaining advice from an external financial planning or management expert like an accountant, tax specialist or financial planner (versus 43% of lowest quintile).
 
Members of the top group were more likely to be adequately insured in order to control their exposure to risk. They also showed greater awareness of investment risk. Other areas affected by lower levels of business and financial literacy were the lack of understanding of the requirement for accurate and honest disclosure with insurances matters. The lower levels also registered poorly on their fulfilment of responsibilities in relation to repaying consumer debt and the implications for an individual’s credit rating if repayments are late as well as the responsibility to keep personal banking details secure.
 
The conclusion to be drawn in these instances is that limited knowledge and comprehension of financial matters can lead to negative financial outcomes resulting in significant potential loss.
 
Members of the lowest group were also a lot less confident that they were capable of making an effective complaint about a bank or other financial institution if something does go awry- 50% versus 63% of the total sample. The lower levels also, in comparison to those displaying relatively elevated degrees of financial literacy, were less likely to employ financial behaviours that potentially could result in their banking being less expensive and more efficient. They also compared debit interest rates and mortgage products less than the more financially literate groups.
 
Other areas that seemed to be affected were the need for savings on a regular basis as well as the need to make their own provision for a comfortable retirement because of their belief that ‘the Government will make up any gap” Another disappointing area to note was that the percentage of investors who believed that diversification of investments was less important has remained lower in the groups with less financial literacy.
 
It is widely accepted that the above considerations link in strong correlation with a lack of pertinent management skills and insufficient capital to account for up to 75% of all causes of SME failure. Alternatively, it maybe stated simply that low levels of business and financial literacy result in a “lack of sophistication” of some SME owners. Educated and capable SME owners seem to comprehend the advantages of compensating for their own deficient skills or knowledge by seeking external aid with the above matters However, less sophisticated and less capable SME owners may seem either unwilling to or unaware of the need to reach out for help, feeling that they should do everything themselves.
 
The effects of lack of Business and Financial literacy can typically result in the following:

  • loss of wealth – personal and national
  • loss of national productivity
  • lack of available small business contractors to meet segment demand
  • loss of skilled knowledge and intellectual capital from the small business sector
  • loss of employment in the small business sector
  • reduced national savings
  • lacklustre growth
  • ptential bankruptcy
  • lss of savings
  • rduced life expectancy through stress
  • fmily and social breakdown
  • suicide, despondency, depression
  • substance abuse
  • stress related illness
  • increase in crime
  • higher incidence of business fraud
  • insurance fraud
  • lack of savings in retirement
  • increased dependency on social security
  • and many others.

Rapid advances in technology have resulted in the formations of new business methods, systems and processes that require a more skilled and progressive workforce that once was the case. Globalisation has made the commercial world smaller and competition is the new order. This has brought with it levels of quality assurances and accreditations of each activity in the business cycle thus requiring increased worker skills in commercial literacy to maintain and drive further improvements.
 
In addition, we are faced with an aging workforce. This group haven’t always had access to technology which has put considerable pressure employers to retain and re-skill their senior workers.
 
The importance of the core foundation skills mentioned above cannot be overstated. A lack of these skills can be a major obstacle for gaining rewarding and fulfilling employment as well as those seeking to progress up the economic food chain. These core skills result in higher educational achievement which in turn leads to higher levels of workforce participation and higher productivity resulting in more of the “clever country” status that politicians love to spruik about.

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