What is one of the main reasons why small businesses are strongly promoted and supported by local government group of answer choices?

There are currently more than 2.3 million small businesses in Australia1. Unfortunately, an estimated 20 per cent of new small businesses in Australia will fail in their first year, and up to 60 per cent of start-up businesses will not survive beyond five years of launching. 

To help give your start-up business the best chance of survival, we’ve asked BOQ’s business banking experts for their insights into the top reasons why small businesses fail and how to avoid becoming one of them. 

1. Lack of research 

One of the most common reasons for start-up businesses to fail is that there is no market need for their product or service. So, one of the most important first steps you need to take when you are setting up a business is to conduct research into everything from the existing market, current and future trends in your industry, to who your competitors are, who your target audience is and what will motivate them to do business with you. 

2. Not having a business plan 

“A good business plan can help you get clear on the direction of your business, identify strategies and an action plan for you to achieve your business goals, and help you secure the financial backing you need to start or grow,” said Martin Hoffman, BOQ Business Head of Corporate, Victoria and Western Australia.

Writing a business plan is an important step towards setting up your new business and achieving your business goals. On the flipside, without a plan your business is vulnerable to one of the most common reasons for small businesses to fail – mismanagement. Having a business plan will also help you stay focused and on track.

3. Not having the business funding they need 

Running out of cash or not understanding what costs are involved in setting up and keeping a business running are a common trap for many small business owners. And the reality is that not every small business owner has the capital to cover the costs associated with starting a new business. So, understanding the fixed and variable costs associated with starting your business should be taken into account when you write your business plan.  

Talking to a small business banking expert will help you understand what financial assistance you may need – whether you need to apply for a business loan, equipment finance or find out about government support for small business owners.

Tip: Never forget that ‘cash is king’.  Even profitable businesses fail due to lack of cash flow, so it is important to negotiate across all aspects of your business. Don’t wait too long for your customers to pay for your goods and services, and always try to negotiate payment terms with your suppliers that are consistent with the cash needs and demands of your business.

4. Financial mismanagement  

Aside from not having the business funding you need to start up your business, not understanding how to manage your cash flow or stay on top of all your financial responsibilities as a small business owner can be a recipe for disaster.

Cash management must be a top priority for small business owners because if your cash flow doesn’t balance out, you’ll find yourself in deep water fast. That’s a business risk you want to avoid at all costs.

5. Poor marketing 

Unfortunately, many start-ups think it is a case of ‘build it and they will come’ when it comes to promoting their new business. A thriving small business needs a regular stream of sales and customers – and you need a marketing plan to do that. 

Depending on the nature of your business and who your target audience is, a good marketing strategy will have the right balance when it comes to attracting new customers (acquisition) and building a base of loyal existing customers (retention). 

Striking a balance between ‘traditional’ offline marketing activities (such as advertising, direct mail, letter box drops, local area marketing, posters and flyers, business to business marketing) and digital marketing (including having a website for your business and using social media for business pages to target your audience).  

The good news is that there are a number of ways to market your small business on a budget, but it’s important that you monitor and measure the results to avoid wasting valuable funds.  

6. Not keeping abreast of customer needs or the competition 

Building a loyal customer base requires knowing who your target customers are and how you can connect with them. But it’s also vitally important that you have the measures in place to stay on top of what your customer needs are. If you fail to understand what your customers expect from you (through customer feedback surveys, monitoring and responding to comments on your social media business pages, and simply talking to your customers) you risk losing those loyal customers to your competitors. 

Speaking of competitors, you also need to keep track of what your competitors are up to – because if they do a better job of fulfilling your customers’ needs, you’ll lose business to them. 

7. Failing to adapt  

In small business, as in life, things don’t always go to plan. Whether it’s responding to changing trends within your industry, unexpected events (like the COVID-19 pandemic or natural disasters), the impact of broader economic issues (such as changes to interest rates, government assistance and support), or even changes to your personal situation (due to illness or other challenges), it’s inevitable that your business will face challenges along the way. You may have to pivot away from the wrong product or service, a bad hire or an unfortunate business decision in order to survive. The most important thing in this context is to stay attuned to what is happening inside and outside your business and be ready to respond – quickly! 

8. Growing too quickly 

Not being prepared for your own success can also be a reason to fail. Part of understanding the business risks associated with your start up business is knowing what you will need – for example, in terms of staffing, technology, business funding, supply chain management – to be prepared for your future growth plans.  

9. Failing to hire and retain the right people 

One of the biggest challenges that small business owners face is hiring, managing and retaining staff. Establishing a diverse team with complementary skill sets, the right attitude and values aligned with your business from the start will help you in the long run. It’s really important that you not only attract the right people but create a work culture that makes them want to stay. 

10. Not asking for support 

Given the number of challenges there are to overcome, starting a new business can be both exhilarating and terrifying. So, it’s no wonder that many small business owners feel alone, overwhelmed or on the verge of losing focus and giving up. But there are a lot of places to turn to for help including your accountant or business banking expert, getting access to government support for small business, finding a business mentor or local business-to-business support group to ask for help. Signing up for an online business course or tapping into some of the best business podcasts around is also a good way to learn tips from other small business owners. 

Ultimately, whether a business fails or succeeds is heavily influenced by its management capability. Setting up and running a business is vastly different to being a good employee. Unfortunately, it’s not uncommon to see new businesses fail even when the owners are familiar with the industry and/ or business that they buy or set up. It’s critical to undertake in-depth research across every aspect of the business to ensure your chances of success are maximised.  

Contact us to find out more about how BOQ Business can support your small business

1https://www.asbfeo.gov.au/sites/default/files/ASBFEO%20Small%20Business%20Counts%20Dec%202020%20v2.pdf

Learning Objectives

1. Understand the different types of interactions of businesses with government.
2. Explain how businesses try to influence government and the types of responses by businesses to their legal, social, and political environment.

Since businesses are strongly affected by public policies, it is in their best interest to stay informed about public policies and to try to influence governmental decision making and public policy. There are different general ways that businesses view and act on their relationship with government. One perspective is for businesses to consider business and government on “two sides” and in opposition to each other. Some have argued that this was the prevailing dominant mainstream business view in the aftermath of the Great Recession at the end of the first decade of the twenty-first century. It has been characterized as the “antiregulatory” or “limited government” view, and it has been associated with those who believe that free markets with a minimal government role is best for the workings of the economy. This perspective most often focuses businesses’ interactions with government on efforts to minimize government and reduce the costs and burdens on private business and the general economy associated with government taxes, regulations, and policies.

Another business perspective on government is that government should favor businesses and incentivize business performance and investment because businesses are the main source of jobs, innovation, and societal economic well-being, and therefore government should support businesses with grants, tax credits, and subsidies.

A third general view of businesses and government relations is with business in partnership with government in addressing societal matters. This is in contrast to government being the regulator to ensure businesses act in a socially responsible manner.

These views are not mutually exclusive. For example, the same solar business can use some of its interaction with government to try to maximize the benefits, such as favorable tax credits, it receives from government and at the same time work in partnership with government to achieve a social purpose, such as reducing carbon emissions, and then try to minimize its tax obligations. It is also important, as described by Pacific Gas and Electric (PG&E) CEO Peter Darbee previously, that the focus of business and government relationships should be on the type of policies required in response to societal challenges rather than an ideological response about the proper role of government in a free market economy.

Sustainable businesses, such as the companies presented in the case study chapters in this textbook—such as Stonyfield Yogurt, Oakhurst Dairy, and Green Mountain Coffee—tend to focus on their responsibility to the environment and societal impact and also tend to recognize that government policies and programs are often necessary to help them achieve their objectives and therefore are inclined to try to work with and even partner with government to achieve desired ends. It is always important for sustainable businesses to understand how their efforts to achieve profits and to serve a social purpose are both strongly influenced by government policies, and it is always important for sustainable businesses to manage their relationships with government (local, state, national, and international) effectively.

Once a business has an understanding of how government affects their operations and profitability, it can formulate strategies for how best to interact with government. There are three general types of business responses to the public policy environment—reactive, interactive, and proactive.

Reactive responses involve responding to government policy after it happens. An interactive response involves engaging with government policymakers and actors (including the media) to try to influence public policy to serve the interests of the business. A proactive response approach entails acting to influence policies, anticipating changes in public policy, and trying to enhance competitive positioning by correctly anticipating changes in policy. For most businesses, a combination of the interactive and proactive approaches is the best approach.

In meeting challenges from nongovernmental organizations (NGOs) and the media, businesses may respond in a variety of ways, including the following:

• Confrontation. It may aggressively attack either the message or the messenger, and in extreme cases, business has felt justified to sue its critics for libel.
• Participation. Business may develop coalitions or partnerships with NGOs, as McDonald’s did with the Environmental Defense Fund (EDF; see the following discussion) or as Home Depot did with the Rainforest Alliance (see the following sidebar).
• Anticipation. Business may adopt issues management programs to forecast emerging issues and to adjust or change business practices in advance of the passage of stringent laws or regulations.

When business is in a reactive response mode, it most often engages in confrontation of its adversaries. When it assumes an interactive response mode, it participates in dialogues with NGOs and the media and develops partnerships or coalitions to advance new policies and programs. When business behaves in a proactive manner, it anticipates future pressures and policy changes and adjusts its own internal corporate policies and practices before it is forced to do so. While a reactive stance may sometimes work, it often only delays needing to engage in a more interactive or proactive way. An interactive or proactive approach is usually a better way to meet political and societal challenges while also protecting the reputation of the firm.

Home Depot and Rainforest Action Network: From Combative to Collaborative Relationship

Home Depot’s relationship with the Rainforest Action Network (RAN) on the issue of preserving old-growth forest began as combative and reactive but wound up being collaborative and interactive. After discussions with RAN, Home Depot agreed to sell only lumber that was certified as grown from sustainable forests.

Businesses often engage in a variety of tactics to influence government policy. This includes lobbying, political contributions, and interest group politics.

Businesses lobby in different ways. This can include lobbying of Congress and state legislatures and executive branch agencies directly through its own government relations specialists, through an industry trade association, through consultants, or through a combination of all those avenues. Businesses may also engage in indirect or grassroots lobbying by appealing to its own employees, stakeholdersAny person, group, or organization affected by an organization’s actions. For businesses, it can include owners and investors, employees, customers, suppliers, and all members of society affected by the organization., or the general public to make their views known to policymakers. In order to build a broad grassroots constituency, business may manage “issue advertising” campaigns on top-priority issues, or purchase issue ads in media outlets that target public policymakers or Washington insiders.

Business lobbying has a strong influence on public policies. There are more than 1,500 private companies in the United States with public affairs offices in Washington, DC, and more than 75 percent of large firms employ private lobbyists to make their case for policies that can benefit them. This includes more than 42,000 registered lobbyists in state capitals across the nation.

Business may engage in reactive defensive lobbying (defending its own freedom from government regulation) or interactive lobbying (partnering with interest groups on policies that the firm can benefit from). Businesses can also choose to engage in social lobbying, examples of which include chemical companies with the best environmental track record joining environmental NGOs in lobbying for an increased budget for the Environmental Protection Agency (EPA) and retailers wanting to address consumer concerns joining interest groups in pressuring the Consumer Product Safety Commission to adopt more stringent product safety standards. Corporations showing a willingness to join such public interest coalitions can gain reputational rewards from NGOs, the media, and public policymakers.

Businesses also use campaign contributions to support their position and to try to influence public policies that can help them increase profits. Seven of the ten largest corporations in the world are oil companies, based on revenues. Their access to funds for lobbying and campaign contributions gives them a significant voice in the political system and on policies that can impact sustainable businesses.

There are a range of avenues a company might use in making political contributions. The most transparent and legitimate is that of forming a political action committeeA private group organized to elect political candidates or promote a particular policy or political cause. (PAC) to which voluntary contributions of employees are amassed and then given in legally limited amounts to selected candidates. Not surprisingly, larger firms in regulated industries, or in industries exposed to greater risk from changing public policies, such as oil companies in 2010 during and after the British Petroleum (BP) Gulf of Mexico oil crisis, use PACs more often than other firms. Beyond contributing directly to political candidates, firms can also advertise on ballot measure campaigns, and those contributions can come from corporate assets and are subject to no legal limitations.

A 2010 US Supreme Court decision, Citizens United v. Federal Election Commission ruled that the government could not ban independent political spending by corporations, as well as labor unions and other organizations, in candidate elections. This has led to rise of what have become known as “super PACS.” In the 2012 Republican presidential primary, about two dozen individuals, couples, or corporations gave $1 million or more to Republican super PACs to try to influence the primary election.

Business response can include participation in interest group politics. Interest groups play a key role in all democratic systems of government. However, as an interest group is a group of individuals organized to seek public policy influence, there is tremendous diversity within interest groups. Business is just one of many interest group sectors trying to influence public policy (see the discussion previously mentioned). Businesses will encounter interest groups that may support or conflict with their position on an issue.

Businesses face a complex array of formal and informal public policy actors beyond (just) government. Business practices can be strongly influenced by citizen actions that bypass the formal institutions of government. Though they lack the economic clout and resources of industry as tools of influence, citizen groups do possess other tools. They can lobby and litigate, and they can get out large groups to demonstrate in public events and use exposure in the news media as a vehicle for getting their perspective heard.

Businesses are influenced by direct citizen activism and protest. Organized interests and nongovernmental organizations (NGOs) have been the source of influence. After their experiences in affecting public policy in the 1960s and 1970s, many citizen activists grew skeptical of the government’s ability to respond rapidly and effectively and discovered they could often accomplish their objectives more directly and quickly. Citizen groups have both confronted and collaborated with corporations in order to foster change.

Finding that confrontation is often counterproductive and that government lobbying is protracted and ineffective, NGOs often turn to collaboration with business to resolve issues. Indeed, as both sides have matured and grown less combative, business and NGOs have learned to work together to resolve problems. There are many examples of such productive collaboration, the most prominent of which have emerged on the environmental front. For example, the Rainforest Action Network (RAN) has worked with Home Depot, Lowe’s, and several timber companies in an initiative to protect old-growth forest. RAN combines elements of activism and even militant protest along with peaceful collaboration.

The EDF is an example of an NGO working cooperatively, in contrast to a confrontational approach, with corporations. The EDF was an early actor in this way. In November 1990, the Fund began to work with McDonald’s to help the company phase out its polystyrene clamshell food containers. It was a collaborative effort to significantly reduce McDonald’s negative environmental impact by cutting its solid waste. It was the first major partnership between an environmental group and a Fortune 500 company in an era when environmental and business interests were often at odds. EDF and McDonald’s worked together to develop a new solid waste reduction plan. The initiative eliminated more than 300 million pounds of packaging, recycled 1 million tons of corrugated boxes, and reduced waste by 30 percent in the decade following the initial partnership, and this was all achieved at no additional cost to the company.

Beyond the traditional political tactics, NGOs also have developed new tactics to pressure business. Ralph Nader pioneered the use of the shareholder resolution to protest such corporate actions as discriminatory hiring, investment in South Africa, nuclear power, environmental impacts, and corporate campaign donations. Since the 1970s, religious organizations, most prominently the Interfaith Center on Corporate Responsibility, have been the chief sponsors of such resolutions. More recently, they have been joined by mainstream shareholder groups, such as large institutional investors and pension funds, in calling for major changes in corporate governance and more recently for more attention to businesses’ environmental footprint and contribution to greenhouse gas emissions and global warming.

Businesses have to also understand the importance of another actor in the business and public policy sphere—the news media. The media provides important functions for both society and business. For example, it influences the public policy agenda by filtering the various events and interest-group areas of attention and it can serve as a sort of “watchdog” over both business and government exposing any unethical practices. Business must constantly monitor the media and be ready to respond. In particular, since the media are usually a pivotal actor in any corporate crisis, company “crisis management” plans must include steps for dealing appropriately with the media and other critics.

Key Takeaways

• There are three general categories of business responses to the public policy environment—reactive, interactive, and proactive.
• Business efforts to influence public policy and government include not only individual company efforts but also business association efforts.
• For most businesses, some combination of the interactive and proactive approaches with government and other interest groups is most often the best approach.
• Businesses, individually and collectively; citizen interest groups; and NGOs all have influence on government policies. These entities often partner to influence public policy.
• Business practices can be strongly influenced not only by government but by direct citizen and NGO actions that bypass the formal institutions of government. Especially since the 1990s, business has been increasingly influenced by direct citizen activism.
• The media has a strong interest in giving visibility to issues and setting the policy agenda. Businesses must view the media as an important influencing agent affecting their operating environment and must be effective in its relations with the media.

Exercises

1. Search the business press and Internet for recent examples of businesses responding to challenges from NGOs or the media in confrontational, participatory, and anticipatory manners. Discuss the benefits and problems associated with the three approaches.
2. Find two recent examples of businesses using lobbying to try to influence government policy, one successful and one not successful. Describe why one failed and one was successful.
3. Pick an environmental or energy policy being considered at a federal or state level. Discuss how businesses, individually and collectively; citizen interest groups; and NGOs all have influence on this policy.