A lack of clear strategic planning and execution is behind the failure of too many SMEs with the latest ASIC figures showing it is the leading cause of insolvency for 42 per cent of businesses in the last financial year.
Poor strategic management was responsible for 42 per cent of insolvencies in 2012-13 and 44 per cent of insolvencies in 2011-12, meaning it is the major reason why businesses have failed over the past three years.
The sectors hardest hit by the failure to develop sound strategic management plans are those in the construction sector (with 892 businesses failing for this reason), the hospitality sector and the retail sector.
XGAP management consultancy co-founder, Martin West, told Dynamic Business there was a time efficient and cost effective three-step approach to improve strategic management and help stave-off business failure.
“It involves the leader asking ‘what are the 12 month goals for the company’ and just limiting them to three,” he said. “The second thing is to ask each person ‘what are the three things they need to focus on to meet those goals’ and the third thing is to meet once a week for 45 minutes to discuss progress.”
“It’s not difficult, it’s not complex, but it has a huge impact.”
Mr West, a former fighter pilot squadron leader who founded the consultancy with ex-NBL basketball coach Mark Bragg 12 years ago, said it was easier for small businesses to take these steps but warned they often became distracted.
“It’s funny. It’s actually easier to do with a small business. A small business is very entrepreneurial and, in theory, it’s easier to do those three things, but in practice it gets put off. They think ‘we’re small, we’re nimble, we don’t need to do this’.”
Of businesses that are struggling or fail, Mr West said he believed one third were most likely never going to succeed. This is because the idea or business concept is unable to gain market traction or because the owner is simply not cut out for the responsibilities of running a business.
However, he said two thirds of the businesses that failed could have changed their path or trajectory if they were smarter about pursuing their objectives.
The ASIC insolvency figures for the 2013-14 financial year show that inadequate cash flow or high cash use was responsible for 43 per cent of reported insolvencies. Poor strategic management was responsible for 42 per cent while trading losses were responsible for 33 per cent.
Small businesses continue to be the most likely to fail with 86 per cent of reported insolvencies relating to companies with assets of $100,000 or less and 81 per cent of failures from businesses with fewer than 20 employees.
