2.3.3 Business Failure

Question 1

Definition: Business Failure

Answer 1

• Business failure is when a business ceases to trade or when a business does not trade in a profitable way or when a business makes a terrible decision

Question 2

Internal causes of business failure

Answer 2

1. Poor efficiency
2. Poor marketing
3. Failure to innovate
4. Bad management of working capital

Question 3

Poor efficiency for an internal reason for business failure

Answer 3

• In 2013 Modelzone closed leaving £9million of debt unpaid to Lloyds bank
  • 47 stores closed and 387 workers lost their jobs
  • This was due to an aggressive and disastrous expansion plan
  • The store opened 15 new shops between 2010 and 2012 but did not have the sales to sustain it, as online trade was taking the business
  • Reason for failure: Unrealistic sales forecasts which lead to over expansion

Question 4

Failure to innovate

Answer 4

• Kodak the camera film producers knew that digital was coming, they even marketed that they were going digital
• Kodak failed to move fast enough into the digital world and didn’t recognise it as a disruptive technology
• Those who wanted to innovate were too low down the hierarchy and were not listened to
• With 90% of the roll film market Kodak had become a complacent monopolist

Question 5

Poor management of working capital

Answer 5

• Management of working capital is critical if a business is to survive
• Working capital performance is a measure of efficiency that compares a businesses’ assets to its liabilities
• Inability to manage cashflow is the most common reason businesses fail. Many profitable and seemingly successful businesses have gone ‘belly-up’ because they haven’t had enough cash to pay their bills on demand.

Question 6

External causes of business failure

Answer 6

1. Economic recession
2. Strong pound – reduced export demand

Question 7

Economic recession as a reason for business failure

Answer 7

• As a country enters economic recession, customers start to save rather than buy
• They put off decisions to purchase large expensive items and they also switch to buying more inferior goods
• These buying decisions means that some businesses fail in a recession – whereas others might prosper

Question 8

Strong pound as a reason for business failure ?

Answer 8

• Strong pound means that manufacturing businesses who heavily export will be affected
• It means their goods and products that they manufacture will cost their customers more
• Some businesses shift production overseas to counter this effect but not all can afford to do this

Question 9

Financial failure

Answer 9

The end of trading due to mismanagement of the
business finances

Question 10

Non-financial failure

Answer 10

The end of trading due to a factor beyond the finances of the business