Why Businesses Fail. Is the GFC to blame?

Why did 8,500 Australian businesses fail in 2009-2010 and what can we do about it?

Here we examine the unfortunate trend in the rate of failure of Australian businesses and what you can do about it.

There has been a steady increase from around 6,200 in the 2002-2003 financial year to just on 8,500 businesses failing in 2009-2010. 

What’s driving this?   

The trend in business failures in Australia over the last eight years has been alarming. Business failures in 2009-2010 were 37% higher than in 2002-2003.

Why businesses fail

When a business goes into administration or receivership the Australian Securities and Investment Commission (ASIC) requires the Administrator (or Receiver) to submit a detailed report covering what they found in the business as well as the steps they have taken to either resurrect or wind up the business. In this report they are asked to include the two or three major contributing factors which led to the failure of the business.

Reviewing this information (it’s available via the ASIC website) gives us some good insights into how to not only avoid being a statistic but also how to thrive.

When we analysed the detailed reasons give for the failure of these businesses (in 2009-2010, the most recent year for which data is available), we see that the three major contributing factors were.

1. Lack of forward business planning - 44%
2. Inability to manage cash flow – 41%
3. Poor financial controls and record keeping – 33%

The reason we hear most about in the news media, “the current state of the economy”, was seen as a contributing factor in less than 25% of cases!

What this tells us is that the success (or failure) of a business is largely in the hands of the managers who make the daily decisions in its operation.  If effective planning and control disciplines are in place then it would appear a business is far less likely to fail.

Some of the most concerning aspects in these reports for 2009-2010 were:

  • Shareholders/owners in over 22% of cases actually owed money!  Often to secured creditors.
  • From an employees’ perspective, 30% of businesses were unable to pay accrued leave entitlements and 39% had not made the required superannuation payments.

For most managers & operations executives reading this article who are part of a successful business that, in all likelihood, only has a small chance of failure.  You might want to consider:

  • What controls, processes and continuous improvement systems do you have in place and are monitoring.
  • Sparing a thought for the businesses you deal with; any one of them may not have similar controls in place.

Most of us have gone through the pain of having a supplier (or a customer) go broke; it’s not a pleasant experience!  A bit of the right advice or support from you, might be all they need to keep them in business!

Everybody suffers when a business fails!    

Contact Performance Drivers to improve your business results on 61 2 9683 6200 or email  admin@performancedrivers.com.au.