Small-business confidence: surviving the reality check

Small-business owners are a pretty confident lot. Some would say you have to be in order to back yourself to start in the first place.

That confidence is also borne out by some solid research. For example, despite economic conditions being good, bad or just ordinary, according to 2017 NAB’s Understanding Australian SMEs report, 60 per cent predict themselves to be “strong business owners”. It’s even higher for millenials many of whom are just starting out. That same research found that 80 per cent of SMEs feel optimistic about their businesses with between 45-72 per cent expecting to either grow their business or increase profitability in the next three years.

And research done by CommBank earlier this year found that if you see yourself as an early adopter you’re even more likely to have confidence about your future in business.

Yet the ABS’ hard data around small business tells a different story.

  • 60 per cent of Australian small businesses don’t survive their first three years. Even in the land of start-up, the USA, the numbers are surprisingly similar with 53 per cent of all businesses closing in the first five years.
  • Only 12 per cent of all Australian businesses employ more than five staff members. Whereas the profound majority (60 per cent) employ none and just 28 per cent employ one to four people.

But, by far, the most shocking is this little gem.

  • 24 per cent of Australian businesses turnover less than $50K per year and 35 per cent turnover between $50-200K. That’s turnover, not profit and not salary paid to the business owner.

So why does such a discrepancy exist between the two? It’s called the overconfidence bias – where a person, in this case, a business owner’s subjective confidence in their own ability to deliver an outcome is higher than the actual (and measurable) outcome delivered. In other words, we back ourselves more often than the odds say we should.

Although that might sound a bit depressing, when it comes to winning the business battle, forewarned is forearmed. Being aware of the odds and knowing the realities of other people’s turnover means you can safely ignore much of the self-aggrandisement that happens when business owners get together and talk about how “well” they’re doing. You will secretly know the truth.

Knowing the real reasons small business fails might mean you can avoid it. ASIC found that 44 per cent of small businesses failed due to poor strategic business owner decisions. Similar US start-up research highlighted the largest issue reported by failed start-up owners was that their business model just wasn’t viable. Running out of money (cashflow) and not having enough help are also high on the list.

Turns out many small-business owners know they need to conserve their cash and not hire too quickly. However, that often means doing everything themselves and that can lead to exhaustion and overwhelm (which leads back to poor decisions).

So, what can you do to ensure you build a lasting business? Two things.

First, make sure that your business model is sound. New university research shows that if you understand margins of safety (i.e.: the difference between actual sales) and breakeven around pricing, breakeven analysis and costs, you’re more likely to survive. A good accountant can help you run your price modelling and break evens.

Second, get some help. Challenge yourself to find a way of having someone help answer your phone or free up time spent working in your business that won’t burn through cash so that you can work on it at least a couple of hours a week. Maybe consider finding an intern or, better still, a part-time or virtual professional.

Roland Farrugia, Virtual Services Advisor, Serviced Offices International