Australian Business Advisers
Why do most new start-up businesses go bust ?

Supposedly some 50 % of new businesses go bust within 5 years from start-up.

What is the reason for this? Let me start with an example of a new business startup.

Let's take the example of someone who worked for an electrical contractor in Melbourne. Let's call him Jerry. He is a very capable electrician and he even won the electrical apprentice of the year award in his final year. He saw his boss, who employs some 20 electrical contractors, driving around in a late model luxury car and the business was continually expanding and appeared to be doing very well.

After working a couple years for his boss, Jerry decides to set up his own business. He leaves, starts a new contracting business, and 18 months later the business has gone bust. What went wrong ?

Jerry may have been a top technician but in addition the business requires that someone be responsible for quoting for the work, preparing invoices, chasing customers for payment, ordering materials, manning the phone and following up, keeping records, handling administration, installing some simple systems, preparing advertising copy for the business, marketing the business etc - and oh, yes - someone still has to do the contracting work.

The business has gone bust even though the owner is extremely good at doing the work. There are many functions which need to be carried out efficiently eg marketing, sales, administration - as well as the production/service function.

A chain is as strong as its weakest link and businesses are often only as strong as the weakest department or the weakest function. If the owner is strong on the technical side as in Jerry's case (ie doing the work) but has an aversion to marketing or administration then such businesses will often experience difficulties because of the lack of attention to these areas. (It is not necessary for business owners to be expert in marketing or accounting to succeed. However, what is necessary is the ability to realise the importance of these functions to the success of the business, and then ensure that these functions are adequately managed; typically by someone else).

In Jerry's case he thought of himself as OK in marketing and sales. In fact he said that he enjoyed meeting new customers (Jerry's definition of marketing) but he hated paper work. He disliked it so much that he never bothered to check completed jobs against the original quotes. In other words, Jerry never really knew if he made a profit on a job or not. Little wonder that …

Business people who recognise that business functions - such as sales, administration, production - complement each other and that these functions need to "join" smoothly to produce an efficient business, overall - have a much better chance of success.

The moral of this example is thus:-

• Establish what are the essential business functions and then ensure that these complement each other ie integrate these functions to form an efficient whole (business or business unit).

Other reasons why businesses fail include:-

• Working "in the business" rather than "on the business". Take a helicopter view of the business. Step back now and then. Try to look at your business objectively. Develop a strategy for continued growth. Install systems to streamline and simplify the business..
• Difficulty in delegating. Many owners say "if I do it myself, I know it's going to be done and it's going to done well". If the owner believes this and acts on it, it will inhibit growth and staff development - 10 years later the owner is still doing it, better than anyone else can do, on his own !
• Absence of monitoring systems. If you don't establish KPI's (key performance indicators) for the business and monitor these regularly, you won't know if you're going forwards or backwards - and probably just as importantly, you won't know why.
• Lack of planning. Owners should spend at least 20% of time on planning. If the owner is constantly "fire fighting" and has no time for planning - the result is obvious - this will simply ensure that even more time will be spent on "fire fighting" down the track. It is amazing but there are a vast number of business owners who work flat out and have no time for planning the future. As a result these owners will probably be very busy for a long time - often trying to save the business!
• Believing that the product is king and that technical superiority is 90% of what business it all. This is a common mistake. Often the commercial issues are overlooked. This leads to the next point.
• Inability to commercialise. Look around you and you will notice that within Australia we have enjoyed a high degree of technical innovation, often initiated by small to medium sized companies. However, the number of innovations which have never seen the light of day (or commercialised by others) because of an inability to commercialise this "competitive edge" is amazing.

One other point to keep in mind in managing your business. Look at your business as if you're going to sell it tomorrow. This will force you to look at the value of your business. You will then also become aware of those actions which will result in an increase in the value of the business and those actions which do not. Build a business which can prosper without your day to day involvement. As an example of this, if you are a sole electrical contractor and you retire, the value of the business is probably nil as you have nothing to sell (you're it) but if your business is established and you have engaged 10 electrical sub-contractors for some years, then you own an asset. This asset has a value, is saleable, and it provides you with the option of scaling back your day to day input over time (eg by engaging a general manager to take over your role) or selling it.

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A USA version (eg Australia replaced by USA) of the above article written by Robert Jongebreur was recently reprinted in the American Society of CPA's magazine.