15. Business Failure Flashcards
What is one measure of business failure?
Global Insolvency Index (Global Business Failure)
What are the internal causes of business failure?
Poor management of cash
Overestimating sales
Over trading
Poor inventory control
Poor marketing
Poor quality
How is poor management of cash an internal cause of business failure?
- investing too much into fixed assets
- allowing to much credit
- overborrowing
- seasonal factors
- unforeseen expenditure
- external factors
- poor financial management
How is investing too much into fixed assets an example of poor management of cash (business failure)?
Spending too much on things like equipment and other capital items uses up resources.
SOLUTION: leasing
How is allowing too much credit an example of poor management of cash (business failure)?
Giving customers too much time to make payments = business have to wait for money = leads to bad debts
How is overborrowing an example of poor management of cash (business failure)?
More loans taken with higher interest
SOLUTION: important to fund growth in a balanced way
How are seasonal factors an example of poor management of cash (business failure)?
Sometimes trade fluctuations occur due to seasonal factors eg. Agriculture
How is unforeseen expenditure an example of poor management of cash (business failure)?
Trade demands, strikes, bad debt
How is external factors an example of poor management of cash (business failure)?
Factors out of control of the business eg. Change in consumer tastes
How is poor financial management an example of poor management of cash (business failure)?
Inexperienced in managing cash or poor understanding of the way cash flows
SOLUTION: operate on an efficient credit control system
How is overestimating sales an internal cause of business failure?
Consumer tastes and preferences can change dramatically in a short period of time
How is over trading an internal cause of business failure?
Occurs when a business is attempting to fund a large volume and product or try to expand too quickly
How is poor inventory control an internal cause of business failure?
Ineffective inventory control means holding too much or too little stock
How is poor marketing an internal cause of business failure?
The 4 P’s (marketing mix)
Market research
How is poor quality an internal cause of business failure?
Damages business reputation
Due to widespread use of social media, word about it can spread quickly
How is market conditions an external cause of business failure?
Dynamic market, business either adapts or fails
Society is increasing demand for energy generated from environmentally friendly production methods
How is competition an external cause of business failure?
Strength and success of competitor can impact business success
How are economic reasons an external cause of business failure?
General state of economy, domestic and global can impact business success
How is exchange rates an external cause of business failure?
Import and export will both be affected by changes in exchange rates
Appreciation: increase in value of currency means decrease in exports
Depreciation: means business won’t be able to import but can export
However, if business is able to import raw materials from overseas, imports will be cheaper deducting cost of production and improving competitiveness
How are interest rates an external cause of business failure?
Higher interest rates will increase business debts increasing risk of failure.
Rising debts causes problems for business with higher burdens and interest rates
How are government regulations an external cause of business failure?
Can lead to business failure by reducing subsidies and cutting government expenditure
How are supplier problems an external cause of business failure
If they fail to deliver materials, online businesses cannot meet customer orders which will damage business reputation
Especially in the case of JIT (just in time) manufacturing.
How are natural phenomena an external cause of business failure?
Eg. Weather, especially in agricultural industries.
