Starting a Business

1

Lecture Outline
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Small Business Failure
Options in Starting a Small Business
Basic Ownership Structures
Strategic Planning

2

Business Failure
Failure as a % of start ups – Study 1
Year 1

32%

Year 2

17%

Year 3

13%

Year 4

7%

Year 5

5%

TOTAL

74%
4

This is an Australian study showing failure rates across new small business (all industries) between 1973-1990. The stats show that 32% of the businesses were no longer around after 12 months and so on. It is clear the first year is the most difficult and those that failed were generally those who ran out of money prior to breaking even (i.e. ran out of money before they were able to attract enough customers) and/or made some of the critical errors outlined on slide 9.

Business Failure
Failure as a % of start ups – Study 2
Year 1

15%

Year 2

15%

Year 3

8%

Year 4

7%

Year 5

5%

TOTAL

50%
5

The study examined organisations which started trading at around the same time (these are new businesses, not franchises or existing businesses that were purchased). The study again demonstrates the difficulty of being successful when starting a new business.

Business Failure
Failure as a % of start ups – Study 3
Year 1

26.2%

Year 2

19.2%

Year 3

14.3%

TOTAL

59.7%

6

This is a US study demonstrating the percentage of new restaurants/cafes that failed between 1996-1999. It again paints a gloomy picture.

Business Failure
Failure as a % of start ups – Study 4
Year 2

50%

Year 5

36%

Year 10

10%

TOTAL

96%

7

This study, showing the percentage of a sample of small businesses that went bankrupt in South Australia between 1975 – 1985 is perhaps the gloomiest of them all. The question that must asked is why??

Business Failure
Main Reason for Business Failure
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Poor Management.
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Ineffective or inexperienced
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91% of businesses in South Australia failed due to poor management (1974-1985).
94% of 17,000 US business failures due to poor management.
96% of 2,598 Canadian failures due to poor management

90% of failures due to managerial inadequacy
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48% incompetence, 42% inexperience

8

Rather than economic environment or other external factors, the primary reason for business trouble is inexperienced managers making poor decisions.

Business Failure
Consequences of Poor Management
1.
2.
3.
4.
5.
6.

Poor Planning
Poor Price Structure
Poor Investment Decisions
Lack of Budgetary Control
Inadequate Finance
Lack of Internal Controls

(Topic 1)
(Topic 2)
(Topic 3)
(Topic 4)
(Topic 4)
(Topic 8)

9

This is a critical slide. It sets out reasons for business failure and shows how
Acc100 will address each of these reasons over the first four weeks. No student should be wondering why we are addressing CVP or capital budgeting for example. We are doing so because they have been identified as reasons for business failure so we are trying to ensure students, if they are managing their own or someone else’s business, do not replicate these mistakes.

Planning
Entering the Business World
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One decision you need to make is how you are going to enter the small business world.
You can choose from one of three options:
1. Start your own business
2. Buy an existing business
3. Obtain a franchise

10

Planning
Starting a New Business - A Cafe
Benefits
1.
Independence.
a)
Run the business your way. 2.
Low Cost.
1.
Rent a store
2.
Buy equipment
•
•
•
•

Coffee machine
Tables and chairs
Signage
Inventory

Limitations
1.
No Customers
•

‘Teething’ Problems

2.



3.

Costs may exceed income for a long period. Can you survive until enough customers have been found? New staff
New technology and equipment. Inexperienced Manager?
11

The point of slides 11-14 is to demonstrate that each option