inability to compete with other similar businesses, or a lack of
Causes of Business Failure
The following are some possible causes of business failure.
• Cash flow problems
• Poor business planning
• Fall in demand for the product
• Rise in costs or a lack of control of costs
Cash Flow problems
For many small and newly formed businesses, this is often the
single most important reason for business failure. The problem
arises when the money coming into the company from sales is
not enough to cover the costs of production. It is important to
remember that it is a case of having the money to be able to
pay debts when the debts are due, not simply generating
enough revenue during a year to cover costs.
Poor Business planning
Many new businesses will have to put together a business plan
to present to the bank before it receives loans or financial help.
The time and effort put into these plans is crucial for success.
Bad planning or poor information on which the plan is based is
likely to lead to difficulties for the firm. For example, if the
firm plans to sell 2,000 units per month in the first year
because it used only limited market research and ends up only
selling 500 per month, it will soon be in serious danger of
collapse.
Fall in demand for the product
There are a number of reasons why demand might fall. Some
of these might be to do with the business taking their eye off
the ball and not paying sufficient attention to their customers'
needs - perhaps the product is not up to scratch, perhaps the
quality is poor, maybe the price is too high - most of these
things are within the businesses control.
Falling sales might be a sign that there might be something
wrong with the product or the price or some other aspect of the
marketing mix. Sometimes the fall in sales might be as a result
of the competition providing a better product or service - in
part the business can do something about this they have to
recognise it in the first place.
Rise in costs or a lack of control of costs
Costs of production can rise for a number of reasons. There
may have been wage rises, raw material prices might have
increased (for example the price of oil or gas), the business
might have had to spend money on meeting some new
legislation or standard and so on. In many cases, a firm can
plan for such changes and is able take them into account but if
the costs rise unexpectedly, this can catch a firm off guard and
tip them into insolvency.
Business failure occurs when your business has reached a
point (commonly insolvent) where it can no longer continue
trading without encountering further problems. These problems
may offer no feasible solutions and by continuing to trade, you
put yourself in deeper trouble. At this point, it is important that
you accept business failure early or you will face increased
financial and legal problems when you try to save your
business or put it to rest.
Business failure does not always occur because of problems in
your own business, but can be achieved as a knock-on effect
from actions made by other businesses, suppliers and
customers. It is therefore important that you recognize the
early signs of business failure before it is too late for the
situation to be resolved
Business failure, or colloquially going out of business, refers
to a company ceasing its operations following its inability to
make a profit or to bring in enough revenue to cover its
expenses.
REASONS
Some businesses fail early on. This can occur as a result of
wars, recessions, high taxation, high interest rates, excessive
regulations, management decisions, insufficient marketing,
interest from the public in the business's offerings. As well,
some firms can be sold to another owner, or merged with
another firm. Some businesses may choose to shut down prior
to an expected failure. Others may continue to operate until the
very last day before they are forced out by a court order. Yet
with some small businesses, the owner may voluntarily cease
operations not due to financial constraints, but as a result of a
personal decision, such as retirement.
After closing, a business may be dissolved and have its assets
redistributed after filing articles of dissolution. A business that
operates multiple locations may continue to operate, but close
some of its selected locations that are under-performing, or in
the case of a manufacturer, cease production of some of its
products that are not selling well. Other failing companies may
be purchased by a new owner who may be able to run the
company better, or else merge with another company that will
then take over its operations. Yet some businesses may be able
to save themselves through bankruptcy or bankruptcy
protection, thereby allowing themselves to restructure.
CAUSES
In economics, a recession is a general slowdown in economic
activity over a sustained period of time, or a business cycle
contraction.[1][2] During recessions, many macroeconomic
indicators vary in a similar way. Production as measured by
Gross Domestic Product (GDP), employment, investment
spending, capacity utilization, household incomes and business
profits all fall during recessions.
Governments usually respond to recessions by adopting
expansionary macroeconomic policies, such as increasing
money supply, increasing government spending and decreasing
taxation.
Law establishes from whom a tax is collected. In many
countries, taxes are imposed on business (such as corporate
taxes or portions of payroll taxes). However, who ultimately
pays the tax (the tax "burden") is determined by the
marketplace as taxes become embedded into production costs.
Depending on how quantities supplied and demanded vary
with price (the "elasticities" of supply and demand), a tax can
be absorbed by the seller (in the form of lower pre-tax prices),
or by the buyer (in the form of higher post-tax prices). If the
elasticity of supply is low, more of the tax will be paid by the
supplier. If the elasticity of demand is low, more will be paid
by the customer. And contrariwise for the cases where those
elasticities are high. If the seller is a competitive firm, the tax
burden flows back to the factors of production depending on
the elasticities thereof; this includes workers (in the form of
lower wages), capital investors (in the form of loss to
shareholders), landowners (in the form of lower rents) and
entrepreneurs (in the form of lower wages of superintendence).
Strike action, often simply called a strike, is a work stoppage
caused by the mass refusal of employees to perform work. A
strike usually takes place in response to employee grievances.
Strikes became important during the industrial revolution,
when mass labor became important in factories and mines.
labor cost -wages paid to workers during an accounting period
on daily, weekly, monthly, or job basis, plus payroll and related
taxes and benefits (if any).
Legislation (or "statutory law") is law which has been
promulgated (or "enacted") by a legislature or other governing
body. The term may refer to a single law, or the collective body
of enacted law, while "statute" is also used to refer to a single
law. Before an item of legislation becomes law it may be
known as a bill, which is typically also known as "legislation"
while it remains under active consideration. Legislation can
have many purposes: to regulate, to authorize, to provide
(funds), to sanction, to grant, to declare or to restrict.
The act of law making is sometimes known as legislating.
Under the doctrine of separation of powers, the law--making
function is primarily the responsibility of the legislature.
However, there are situations where legislation is enacted by
other means (most commonly when constitutional law is
enacted). These other forms of law-making include
referendums and constitutional conventions. The term At the turn of the millennium a host of new .com businesses
"legislation" is sometimes used to describe these situations, but were launched in this country based on the hype associated
other times, the term is used to distinguish acts of the with having an 'online presence'. A large number of these
legislature from these other lawmaking forms, which have businesses were based on good ideas - e.g. retailing wine,
been scaled down. clothes and financial services on the Internet.
FIRM However, what many of these businesses lacked was an
established trade name, which the general public was familiar
the members of a business organization that owns or operates
with.
one or more establishments; "he worked for a brokerage
house"
unwavering in devotion to friend or vow or cause; "a firm The major companies that we are familiar with - Coca-Cola,
ally"; "loyal supporters"; "the true-hearted soldier...of Cadbury Schweppes, Nestle have taken years to build their
Tippecanoe"- Campaign song for William Henry Harrison; brand names. Many of the new .coms were seeking to build
"fast friends" brand awareness very quickly. These companies were able to
raise relatively large sums of capital to set up. However,
Business failure
advertising and promotional costs were substantial, and the
Poor marketing pool of capital they started up with rapidly began to run out
Successful modern businesses are ones that understand and before they could make the breakthrough to profitability. What
meet the requirements of their customers. Detailed market we then saw was a high level of business failure in 2000 and
planning and market research is therefore an essential for new 2001 among the new .coms. Although many of their ideas were
businesses, to find out details such as the potential size of the good they ran into cash flow problems. In the end the prime
market, the extent of competition, as well as consumer beneficiaries of the .com revolution were existing companies
preferences and tastes. with well established brand names that were able to embrace
the new technologies.
Cash flow problems
Many businesses struggle through poor cash flow
management. It is all very well having a good idea and a good
product but it is also necessary to be able to meet short term
outflows. Many businesses try to grow too quickly, and end up
borrowing too much money externally, resulting in crippling
interest repayment charges.
Poor business planning
Business planning should cover aspects such as marketing,
finance, sales and promotional plans, as well as detailed
breakdowns of costings and profit predictions. It is often said
that 'failing to plan, is planning to fail'.
Lack of finance
Insufficient finance often means that businesses are unable to
take opportunities that are available to them, or have to
compromise - going for high cost solutions to problems, rather
than lower cost ones that would yield greater competitive
advantage.
Failure to embrace new technologies and new
developments
In a fast changing world leading businesses are ones that make
best use of advanced modern technologies in an appropriate
way. Firms that operate with outdated technologies and
methods frequently find themselves at a cost disadvantage over
more dynamic rivals.
Poor choice of location
Location is a very important business decision. A good location
is one that appeals to large numbers of customers, while at the
same time minimising costs. For example in retailing it is often
a mistake to choose a low cost location, that is not visible to
customers. However, conversely there are considerable cost
advantages to out-of-town retailers that customers are prepared
to travel to visit.
Poor management
Weak and inexperienced management is one of the major
causes of business failure. Managers have to work extremely
hard, and to understand their customers needs, and the business
that they are in if they are to be successful.
Poor human resource relations
Are often a cause of failure. Successful businesses motivate
their employees to work hard to help the business to succeed.
Lack of clear objectives
Successful organisations have clearly focused and
communicated objectives that enable everyone in the
organisation to pull in the same direction.
Brand names