15 Reasons for business failure

Question 1

Define overtrading

Answer 1

Attempting to fund a large volume of production with insufficient cash

Question 2

Define fixed assets

Answer 2

Resources that are used repeatedly for a period of time by a business such as property, tools, vehicles and machinery

Question 3

Define downturn

Answer 3

Period or process in which business activity, production, etc. is reduced and conditions become worse

Question 4

Define undercapitalised

Answer 4

Starting a business with insufficient capital

Question 5

Define outcompleted

Answer 5

Perform more effectively in a particular field

Question 6

What are the main reasons for business failure?

Answer 6

Cashflow problems
Lack of finance
Not competitive
Failure to innovate

Question 7

What are the reasons for cashflow problems?

Answer 7

1. Overtrading
2. Investing too much in fixed assets
3. Allowing too much credit
4. Overborrowing
5. Seasonal factors
6. Unexpected expenditure
7. External factors
8. Poor financial management

Question 8

How can investing too much on fixed assets be prevented?

Answer 8

May be better to lease some fixed assets to protect cash reserves

Question 9

What does ‘paying by credit’ mean?

Answer 9

Means that goods are sold and customer pays for them at a later date

Question 10

Explain the impact of allowing too much credit on a business

Answer 10

Business not having enough money

Because goods are sold and customer pays for them at a later date
Leads to insufficient cash during the period they are waiting
Therefore business may be forced to borrow during this period

Question 11

Explain the impact of overborrowing

Answer 11

Costs rise

Because as more lones are taken out, interest costs rise
Leads to loss of capital for the business
Therefore inability to invest to improve business

Question 12

How can overborrowing be avoided?

Answer 12

To avoid, businesses may use more capital from owners - e.g. by selling shares

Question 13

Define unexpected expidenture

Answer 13

Sudden expenses that businesses don’t see coming

Question 14

Give examples of unexpected expidenture

Answer 14

Equipment breakdowns, tax demands, strikes, bad debts

Question 15

Define poor financial managment

Answer 15

Poor understanding of how cash flows into and out of the business

Question 16

Explain why established businesses may fail to get funding

Answer 16

Established businesses may fail to get funding because their track record is poor and therefore present too much of a risk to investors

Question 17

Explain why new businesses may fail to get funding

Answer 17

New businesses may fail as they have no trading history which is also too risky to investors

Question 18

What are the reasons that make a business not competitive?

Answer 18

1. New entrants
2. Ineffective cost control
3. Ineffective marketing
4. Lack of business skills
5. Poor leadership

Question 19

What might competitors do to win customers over other businesses?

Answer 19

Competitors might bring out superior products
Read market conditions more effectively (understanding wants and needs of the market)
Charge lower prices because their costs are lower - e.g. being outcompeted by low-cost producers in China and other emerging nations
Use ‘destroyer pricing’ (very high discounting)

Question 20

Explain the impact of ineffective cost control on a business

Answer 20

Charging more for products

Because if costs are too high, the business would need to charge more to make a profit
Leads a loss of trade to low-cost competitors
Therefore less customers and reputation

Question 21

What is meant by failure to innovate?

Answer 21

Failure to adopt new technology and keep up with market