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Why Do SMEs Fail?

|Apr 13|magazine13 min read

 

SMEs are most likely to fail because of an inability to manage costs or anticipate rising costs according to a survey, which questioned more than 1000 Australian small to medium sized business owners.

The survey revealed that the most common shortcomings for SMEs are inexperienced management, a bad business model and lack of access to capital, alongside the inability to manage costing. The survey was conducted by accounting software firm CCH and global information service group Wolters Kluwer.

According to the survey, SMEs fail for the following reasons >>>

  • An inability to manage costs (61 percent)
  • Inexperienced management (50 percent)
  • A poorly designed business models or no business plan (50 percent)
  • Insufficient capital (49 percent)
  • Poor or insufficient marketing (37 percent)
  • Insufficient time managing the books (31 percent)

Respondents were able to pick multiple reasons for failure and only 26 percent identified failure to seek professional advice as a key reason for failure, interestingly 70 percent of respondents in fact trusted their ‘gut instinct’ over any professional advice.

However, the Chief Executive of Wolters Kluwer Asia-Pacific, Russell Evans, told SmartCompany during an interview that the majority of SMEs that reject professional advice were possibly doing so at their peril. Evans referred to a separate CCH survey of more than 210 accountants servicing small businesses, which ranked bad business models as the main reason SMEs fail.

“It's a contrast, as if you look at the reasons why an SME owner feels an SME has failed it is inability to manage costs, while the accountants say it is a poorly designed business model,” Evans says.

“A lot of SME owners are fixated on their craft and what they do and they tend to chase revenue, they may send out lots of invoices and not understand the cost drivers.”

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Business Owners Versus Accountants

According to Evans, a typical problem for SME owners is buying a high volume of the wrong inventory “because they feel revenue means success.” He warns a lot of small businesses are failing to identify they are introducing costs into their businesses which are eroding their margins.

“SME owners are incredibly busy until the day they go broke, but accountants say because they have seen this before they can provide advice not just about revenue drivers but profit drivers,” he says.

Evans says the first couple of years of an SME's operation is often identified by SME owners as a make or break period.

“If that is the make or break period they should be reaching out to professional advisers for more than just doing tax returns,” he said. Interestingly CCH’s survey found that SME owners often opened up to their accountants and took their advice on board, once the business had seen growth.

SME owners with a higher turnover of $1 million plus were more likely to consider their accountant as their most trusted adviser, not only for transactional accounts but for advice on business growth, than owners of businesses with turnover under $1 million.

Should You Trust Your Gut Instinct?

Yes, would be the answer from the Executive Director of the Council of Small Business Australia, Peter Strong who said that relying on gut instinct rather than professional advice works in small businesses.

“If you don't use gut instinct then you become very slow at responding and that is not the nature of small business,” he says.

Strong conceded that there are areas for small business where professional advice is needed. “I wouldn't employ gut instinct in filling out a form or around financial management and anything to do with cash flow, marketing and long-term planning, we all need assistance with that,” he says.

When you are the owner of an SME, nothing is black and white, there are grey areas that require gut instinct, after all the company is growing an developing all the time. Strong also notably said that the survey results are not split by industry, and not all industries follow the same rules. Some industries allow for more creativity that other when it comes to developing a strong business model and strategy.

“It's a continuing problem of putting all SMEs in the same bucket; if you went to different industry sectors you would find some talk a lot to professional advisers, for example, real estate agents use a lot of professional advice,” he says.

Starting is business is never going to be easy, and business owners should take advice where they can – they should certainly listen to what other have to say before making their own informed decisions – and that is what is most important. In order for a SME to succeed there does need to be direction and often gut instinct rules, however as a business owner you should always make sure you are armed with the necessary information before you make the final decision.