2.3.3 Business Failure

• Business failure occurs when a company cannot cover its liabilities
• What is the term for selling assets to pay creditors?

  Liquidation
• In receivership, an external administrator takes control to manage finances.
• Bankruptcy is a legal process declaring inability to pay debts
• What does poor financial planning involve in business failure?

  Inadequate budget and cash flow management
• Market changes, such as shifting consumer preferences, are categorized as external causes
• External shocks, like pandemics, can cause business failure.
• What is the impact of ineffective management on business failure?

  Lack of leadership and strategic vision
• Ineffective management involves a lack of leadership and strategic vision
• What are the two broad categories of causes for business failure?

  Internal and external factors
• What type of cause is inadequate budget management in business failure?

  Internal
• Competition is a factor that contributes to business failure under the category of market changes
• Business failure can result from factors both within and outside a company's control.
• What are the two broad categories of causes for business failure?

  Internal and external
• Poor financial planning is an internal cause of business failure.
• Ineffective management refers to a lack of leadership and strategic vision
• What is an example of an external cause of business failure?

  Market changes
• An economic downturn reduces spending and business activity.
• External shocks include unexpected crises like pandemics or natural disasters
• Order the types of business failure from least to most severe in terms of financial stability:

  1️⃣ Voluntary Administration

  2️⃣ Receivership

  3️⃣ Liquidation

  4️⃣ Bankruptcy
• What is a financial impact of business failure?

  Loss of revenue
• Debt accumulation increases liabilities during business failure.
• Asset depletion involves selling assets to cover debts
• What happens to creditors during business failure?

  They suffer financial setbacks
• Shareholders lose their investment in the company during business failure.
• What is a non-financial impact of business failure?

  Job losses
• Business failure can cause economic disruption
• A decline in business reputation is a non-financial impact of failure.
• What happens to innovation during business failure?

  It is reduced
• Match the financial impact of business failure with its description:

  Loss of Revenue ↔️ The business can no longer generate income.

  Debt Accumulation ↔️ Existing debts cannot be repaid.

  Asset Depletion ↔️ Assets are sold to cover debts.

  Creditor Losses ↔️ Creditors suffer financial setbacks.
• Liquidation involves selling assets to pay creditors
• What happens during receivership in business failure?

  External administrator takes control
• Voluntary administration occurs when directors hand over management to administrators.
• Bankruptcy is a legal process declaring inability to pay debts
• Order the strategies to prevent business failure based on their focus:

  1️⃣ Proactive Financial Planning

  2️⃣ Effective Management

  3️⃣ Operational Efficiency

  4️⃣ Adaptability to Market Changes

  5️⃣ Risk Management
• What does proactive financial planning involve?

  Budgeting and cash flow management
• Effective management improves operational efficiency.
• Operational efficiency focuses on optimizing processes to reduce costs
• Why is adaptability to market changes important?

  To stay competitive
• Risk management creates contingency plans to mitigate threats.