Small Business failures in Australia rose by 23% in 2010 to 10,000 firms. It’s a well-known fact that 80% of small businesses fail in the first five years of business, and of those that are left, 80% of those go broke over the next five years.
In many instances the capital to start the business came from drawing down equity on the family home usually by way of a bank loan, but sometimes through more expensive business loans.
Creditors of the business will also often demand a personal guarantee. So business failure is catastrophic for the average family person.
The stress that arises from having to sell the family home to pay off the debt to the bank and secured creditors is enough to leave families destitute.
So why do people go into business risking all their savings in the first place. Well, the most common reasons are that they wanted to be their own boss, earn more money, work better hours and become financially independent.
Soon the reality of running a private business begins to appear. Business owners say:
• It’s much harder than I anticipated being in business.
• My business is erratic, and I find that I cannot plan for the future.
• The money’s not great for the effort I’m putting in.
• It actually cost me money to own this business.
• I’m always busy and often stressed.
• I feel quite alone and isolated, I don’t really have anyone I can turn to for help.
• I feel like I have a good business, but need some new ideas to help to take it to the next level.
Sound familiar? If they are then you may be committing one or more of the seven deadly sins of the small business owner.
So what leads to all this stress and business failure? What are the seven deadly sins that cause private business to fail, leaving their owners in dire financial stress, and what are the simple things that can be done to give business a good chance of succeeding.
Firstly and most importantly, failure to manage cash flow. Any accountant worth his salt can teach you about the importance of cash flow and help in this area.
However we all know from bitter experience that this just doesn’t happen and business owners have to try to manage their own cash flow and generally do this badly.
So the first lesson is learn to manage your cash flow and be sure you have enough cash to pay your debts on time.
Secondly, not planning the future. If you don’t have a vision for the future, then you don’t know where you are going with the business, and you have no idea whether you are being successful or heading for disaster.
Solution: develop a vision for the future. Know where you want to be in five years time and develop and implement a plan to get there.
Thirdly no product, service or market differentiation. Your customers have to have a reason to buy from you and not your competitor.
You have to find a way of providing a better product or a better service than your competitors, otherwise expect to compete on price.
Next, understand the 80:20 rule. This rule applies to almost all businesses. The rule is that 20% of your regular customers or 20% of your products give you 80% of your sales revenue and profits.
So the important lesson is to focus on that part of the business that provides most of your profit.
Fifth, underpricing. Most small business owners compete on price, always believing that they have to offer the lowest price in the market. If you are to receive a fair price or even a premium, then customers have to have a reason to pay the premium.
Next, carefully managing your team, getting the best out of them. Business owners need to inspire their team to do great things and ensure that they know when they are doing a fair days work.
And finally thinking that you can do it all yourself. This is almost never true. Small business owners have to balance working on their business with working in the business.
Almost always, they spend all their time working in the business. Solution, get some help from a trusted advisor, or business consultant.
The small business owner should have well prepared and documented strategic plan and spend at least half a day a week working on their business and do it with a professional who is well qualified to give them good advice.
David Ley is a Director with Thexton Armstrong Ley. Contact at him at david.ley@thextonarmstrong.com.au
