Small Business failures and why?

[Paul Baker]

Hi all

Talking about business failures can invoke lots of superstition as some owners may avoid talking about the bad things that can happen.

It is important to know about the possible things that can go worng, so you can prepare plans to manage them when it happens. My experiences leading an emergency response team to corporate incidents has shown me that every day at least one business takes a huge hit and fails to recover from it.

The statistics on business failure rates on Australian Bureau of Statistics are just like any statistic people use for reference. It deoends on the collection accuracy, what questions were asked, how the data is categorised, the sample size, the sample quality,and who put the survey together.

On the ABS statistics the failure rate is a very small percentage, which looks good, but does not reflect the real business world because;

1. They only count a business as a failure if declared bankruptcy
2. They only counted businesses that they knew about. There are a lot of backyard sole traders that dont declare their business operations.
3. There is a large number of business owners that have two or more businesses operating under a single business name. The owner may close one or more of these businesses but will not count as a failure as long as one of the businesses is still open for trade.

The ABS stats do not count a business closing as a failure if it;

• Just stopped trading and closed their doors without declaring bankruptcy
• Changed their business type completely [Which really states that the first model wasnt working]
• If they sell their business to another owner because it was failing fast, but had not died yet
• If the business grows from a small business [more than 20 employees or more than $2 million turnover] then fails.

I recommend when using statistics for reference to verify or match several surveys against each other and make a decision which statistic you will believe. For example, another ABS statistic survey also states that over a third of new businesses will fail in their first year with most not making it into their fifth year of business. So which figure is correct because both surveys tell a different story.

You can also use surveys from Industry associations, taxation stats, MYOB surveys, Neilson reports, and University Business surveys. Just remember that all surveys have some bias and collection issues that affect accuracy.

The best way for you to assess the failure rate for yourself is to take a walk down your town centre every month and count the number of businesses that are no longer there. It will be more than 1 in 10.

If anyone wants to know more about where to find surveys I am happy to help. Because of my business intelligence background I have spent decades finding information for businesses.

When I use statistics, I use the survey that is commissioned by the organisation most likely to know, then I review their collection process and sample methods to verify the percentage of accuracy.

Dont rely on just the ABS for your stats because they are usually outdated and rely on contracted agents to collect the data instead of trained information collectors.

[Paul Baker]

This collection of data is taken from a research paper attributed to Rolffe Peacock who studied all the business failure survey methods for accuracy.

"The only national longitudinal study of small business starts and exits in Australia was instituted by
Williams (1987). It commenced with business starts in 1973 and is still being regularly updated. By

3

1990, 33,624 start ups had been studied in all industry sectors (Reynolds et. al 1994). The definition of
failure that has been adopted is the inability of the owner-manager to continue because of financial
difficulties:

A termination of business is deemed to be a failure if the firm ceases operating under its existing owners
and structure because it is unable to function profitably, or does so because of existing or impending
failure, insolvency or financial difficulty.

(Williams 1987).
Closure due to ill health, domestic discord, death or personal reasons are not included in the definition and

therefore the results are more conservative by excluding such reasons for closure."

"

In the first year nearly one third of all start ups failed on the average. The proportion of failures then
declined for each subsequent year but the cumulative failure rates are high - 62% after 3 years and 74%
after 5 years. In other words, no more than about one quarter of enterprises have survived 5 years. As
shown in Figure 1 a more gradual rate of decline then occurs until about year 11 and then tends to stabilise.
In commenting on the data, Reynolds et. al (1994) said that ‘It is estimated that up to 30,000 businesses fail
in Australia annually - almost 100 every working day! ........ a huge waste of human and economic

resources.’

One thing I learnt working in intelligence gathering is that statistics can be made to say whatever you want if the person reading them doesnt check the collection and sample processes.

"Trust, but then verify yourself" nothing is what it seems

[zenkarman]

There are good reasons why the statistics on small business failures vary widely across actual studies people have done. We, as a country, haven't historically done a good job of tracking small business closures, and have been much worse about getting information about why the businesses closed, or (in many cases) their financial states leading up to closure. Not all of them needed to report such information. The definition of failure has varied widely across studies. Some consider any business that has discontinued for any reason to be a failure. Some consider bankruptcy or loss to creditors to be the true mark of failure. Some consider a business to have failed if the business closes to prevent further losses. All of these general categories of study give substantially different failure rates.

[jeremy]

Most of the times when we have had clients businesses close it seems to have been that either it got too hard, weren't making enough money or they have moved on to something else they wanted to do in life.

[GeorgeB]

My first business struggled because I tried doing things on the cheap with unqualified people. In hind sight I would have used reputable companies which could have been accountable for their mistakes. The small amounts I saved at the start cost me a lot down the track.

[CarrollGoldsmith]

Good comment GeorgeB, there is an old saying my father often uses, 'you pay peanuts, you get monkeys'. Let's face it no-one wants to feel as though they've been ripped off, but cutting corners for the sake of a few dollars usually comes back to haunt us. I know I had my father's words ringing in my ears when the service level of our original IT reached rock-bottom, and we were forced to make (an expensive) change.

[eversuccesseful]

I agree that you have to spend big dollars to make money
but one thing you have to remember is that scammers know that a lot of people think like that and they charge big money and then fly
where as if they were only scamming two or three dollars they would get a lot more people and keep at it for ever and every one would say o'well but greed is a dangerous thing
have had my spit I feel a bit better
cheers Peter

[Deny Disuza]

Yes, any business can not grow without failure. But there should be a ratio between failure and success.