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Why Do So Many Small Businesses Close?

There are over two million small businesses in Australia, employing 65% of our total workforce. 2012 research from the Department of Industry showed that roughly a third of small businesses interviewed were still operational after three years, a third were in a ‘nascent’ stage (trying to become operational) and a final third had terminated.

The reasons why small businesses fail can generally be divided into three areas – location, planning and running costs. We’ll look at each of these to see how some common problems can be avoided, helping to ensure the future of your business.

Opening your business in the wrong area

We’ve all seen that (frequently empty) retail space that doesn’t know what it wants to be. First it’s a luxury restaurant, a few months later it opens as an indie boutique. That closes, and weeks later it’s selling high-end craft beer, only to shut three months down the track. All these businesses appeal to a niche market of young, inner-city customers. A look at the area shows it’s populated by retirees without the inclination to splash on trendy items. None of those business owners did their homework.

When you are looking for a location for your business, ask yourself “Is this where my customer lives?” If you are opening a hair salon, choose a location that already attracts shoppers you can target – a busy main street, for example. If you are selling used car parts, you can afford to set up in a light industrial area away from an established retail centre since your customers will be willing to travel for the right deal.

The importance of a business plan

A business plan isn’t a single statement, such as, “I’m going to sell home-made aromatherapy products.” A business plan is a complex document that quantifies everything – the cost of making the product and how much it will sell for, designing labels and posters, the cost of renting a space, insurance, a computer to track sales, office equipment and running costs and the cost of advertising. All these things need to be part of your business plan, because anyone you ask for finance or help, whether it’s a bank or the local council, will want to see that you have done your homework.

Factoring in the running costs of a business

Running costs include rental, utilities, a computer to track orders, phones and a fax. It’s the one area of starting a business that can get overlooked, but you need to keep an eye on them. Running costs relate to your net profit margin, an important indicator of business health. Net margin is net income (revenue minus cost of goods and running costs) divided by revenue.

So if revenue is $10,000 and your net income is $9,500, your net margin is 5%. Why is this important? Because a net margin higher than 10% is considered excellent as long as it remains consistent. If your net margin is decreasing month by month, you need to cut production costs or running costs, or both.

To cut running costs you can take advantage of cloud-based technology to provide a 24/7 receptionist service without the cost of hiring an actual receptionist. You can also receive or send a fax from a PC, without the need for a fax machine. A fax to email system piggybacks on your existing email client so faxes are sent as attachments, but still arrive at the other end as if they were faxed the old way.

You can ensure your business remains operational beyond the first three years by monitoring your net margin, following your business plan and thinking carefully about your location. And remember – you don’t have to go it alone. Join your local business network and meet some of the two million other business people who are tackling the same issues as you.

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