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Reasons a Small Business Fails and How to Avoid Them

Starting a small business is a dream for many, but is potential business failure holding you back? Discover five reasons why businesses fail in Australia and how to avoid them.

A recent report by the Australian Bureau of Statistics (ABS) found that the small business failure rate is 33% in the first year, while just over 50% make it past four years.

This a much more encouraging statistic than what’s typically thrown around in pop culture.

Before we go on, though, here’s a business failure definition so we’re on the same page:

“Business failure refers to the situation where a business is unable to sustain its operations or achieve its objectives, leading to its closure or cessation of activities.”

But we want the odds to be in your favour, so it’s a good idea to learn why small businesses fail and how to avoid these situations.

In this article, we’ll answer questions like:

  • What are the major causes of business failure?
  • How can I avoid business failure?

We'll condense these answers into five common reasons that cause people to fail in business along with how to avoid them. 

Common reasons small businesses fail

Why do small businesses fail? That’s the magic question.

CB Insights, a market intelligence and research company, analyzed over 100 startup failures to find common reasons for business failure.

For the sake of brevity, we’ll condense these into five overarching reasons that apply to small business owners in Australia.

1. Lack of capital

A lack of capital includes not having enough funding to cover initial startup costs, ongoing expenses or unforeseen circumstances.

While extreme unforeseen circumstances, such as Covid-19, are impossible to predict with any accuracy, making sure you’re more than adequately funded goes a long way toward business success.

The analysis found that the main reason for business failure was running out of funding with 38% of businesses citing it as the reason.

Naturally, not having enough funding prevents you from operating your business effectively, especially if your business requires a physical storefront, employees or physical stock.

So it’s important to err on the side of caution when planning the funding of your business.

2. Inadequate planning and research

Inadequate planning and research are the bane of many entrepreneurs. Researchers found that out of the failed companies they analysed, 35% were serving no market need while 19% had flawed business models.

This is a direct result of inadequate planning and research.

When it comes to small businesses, this tends to be entrepreneurs who pursue passion-based businesses out of love for their craft. While this is still a valid approach, the services or products you offer must have enough demand to be worth your time.

3. Operational inefficiencies

Out of the 100+ startups that researchers analysed, 20% of them were simply outcompeted in their respective marketplaces.

A large part of this comes down to operational inefficiencies and ineffective management practices. One culprit is inadequate financial planning and budgeting which leads to poor cash flow management and a lack of finances which we addressed above.

But others include poor productivity, such as getting sucked into day-to-day operations while failing to pivot to market demands. Or it could simply be not having the correct operating procedures to compete with others in the marketplace.

4. Poor team chemistry

A bit further down the list came poor team chemistry, with 14% of business failures happening due to not having the right team.

While having the right personalities is important, a large part comes down to the hard and soft skills individual team members have. For example, if your team members can’t communicate well with each other, chemistry suffers.

But on the other hand, getting along too well can also be a cause of failure as your team may lack diverse opinions.

5. Personal factors and burnout

Last on our list are personal factors and burnout.

While researchers found that only 5% of businesses failed due to this reason, it’s fair to assume that this number could be higher.

For one, it’s incredibly uncommon for people to blame themselves for a business failure. But burnout is also hard to quantify, so most people ignore it and instead work harder to achieve their goals.

So unless it’s something explicit, such as health issues, many entrepreneurs will likely attribute their failure to something else.

How to avoid business failure

It’s not always possible to avoid business failure — especially when unforeseen issues arise. But there are ways to put the odds in your favour.

Here are three solutions to avoid business failure:

  • Make research and planning a priority: It’s never been easier to start a business, that’s why you need to be sure your idea is viable. Ensure you deeply understand your target market and what competitors are offering and make sure you have enough funds for unforeseen situations.
  • Build a solid team: To grow your business you’ll likely need a team. Make sure the people you hire have the necessary hard and soft skills to support your company. Additionally, you can foster strategic partnerships with complementary businesses and influencers to fortify your team. 
  • Be ready to adapt: Avoiding business failure requires that you stay agile and responsive to trends, consumer preferences and technological advancements that affect your industry. So be open to feedback and improving your skills as an entrepreneur. 

If your business is currently underperforming, another option is to simply exit as there’s a large market for distressed businesses in Australia. Check out our guide on how to sell a failing business to see if it’s the best option you can take. 

Alternatively, you can list your distressed business on our site to gain access to thousands of entrepreneurs who’d love to turn your business around.

As an entrepreneur, it’s disheartening to think “my business is failing”. But it’s important to remember that, whatever your next steps are, success is possible - whether it’s in your current struggling business or your next venture.

So don’t give up, we know you can do it!



Megan Kelly

About the author

Megan is Head of Content Marketing at BusinessesForSale.com. She is a B2B Content Strategist and Copywriter. She has produced multiple articles that rank on the first page of Google SERPS, and loves creating people-first content.

@Be_theBoss