What causes small businesses to fail: The hidden role of psycho-social factors

Abstract

According to the Australian Bureau of Statistics, one in two small businesses will not make it past their tenth year and within 15 years, 66 percent will have collapsed. Why is this so, and more importantly - what can be done about it? The surprising fact is that external macroeconomic factors only accounted for 26% of the total variability on small business failure rate - a portion far less important than internal factors. In other words, small business success has far more to do with the skill of the small business owner than government and reserve bank economic policy. These results also indicate the psycho-social factors such as motivation, judgment, fatigue, family support, self-efficacy, personality, education, attitudes, and even maturity underlie small business failures and typically manifest as poor management and marketing practices. These results also arguer a greater role for organisational psychologists alongside accountants and lawyers in fostering small business success. Practical guidelines to avoid these pitfalls are suggested.