2.3.3 Business Failure

• External Factors


  Factors beyond the control of businesses cause it to collapse
• Internal Factors

  Factors that businesses are able to control cause it to collapse
• Overtrading


  The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast
• Administration

  A failing business appoints a specialist to rescue the business or wind it up
• Lack of planning


  Not planning especially for business start ups can lead to failure

  They need a clear direction of plans

  Financial planning is crucial
• Investing too much in assets


  May be better to lease equipment
• Allowing too much credit


  Waiting too long for payments

  Waiting too long to pay creditors
• Over borrowing


  It is important to fund growth in a balanced way and not borrow too much money from the bank
• Seasonal Factors


  Some seasons are busier than others and businesses must be prepared for this
• Unforeseen expenditure

  Unexpected payments like broken machinery, strikes or bad debts
• Poor financial management

  Must manage cash flow

  Must plan how it will spend its money
• Lack of funds


  If they cannot attract funding they will fail

  Especially new businesses
• Relying on a narrow customer base

  Relying on a small amount of customers often leads to failure
• Marketing problems

  Making new products that don't meet customers needs may lead to lack of demand and therefore failure

  Inappropriate pricing strategies could mean prices are too high or low
• Failure to innovate

  Taking too long to come out with new, good products may lead to competitors beating you too it
• Lack of business skills


  If owners do not have the required skills and communication within a business it may fail
• Poor leadership


  Poor decision making
• Competition


  The success of rivals can put other businesses out of business

  Cheaper products abroad?

  They advertise better

  They have a better USP
• Changes in legislation


  Changes in government legislation can lead to failure

  Tax on items can cause problems for the businesses demand
• Changes in consumer tastes

  If businesses cant adapt to changes quickly they are more likely to fail
• Economic conditions

  Financial crises can cause business failure

  Recession

  Cuts in public sector jobs

  Lower demand for some products

  Drop in disposable income

  Interest rates and exchange rates
• Changes in market price

  Some businesses have little control over the prices they charge
• Financial failure

  Bankruptcy or insolvency, shortage of cash, inability to pay debts immediately

  Must have an effective cash flow management to succeed
• Non-Financial failure


  Lack of planning, lack of skills, bad competing skills failure to meet customer needs
• Drop in disposable income means


  Customers have less money to spend on certain products, especially luxuries, necessities aren't affected as much