2.3.3 Business failure Flashcards
what is business failure?
when a business ceases to trade or when a business doesn’t trade in a profitable way
what is liquidation?
the process of closing a PLC or an Ltd there will be a sale of assets and the company (as it stands), is dissolved
(some retail companies sell the brand name, stock and stores and continue to trade but under a different management company)
what are the internal reasons for businesses failing?
-poor efficiency
-poor marketing
-failure to innovate
-bad management of working capital
what are the external reasons for businesses failing?
-economic recession
-strong pound (reduced export demand)
why are there high risks when starting a business?
-high failure rate
-difficult to test
-easy to be over-optimistic
-competitors are often aggressive
what are reasons for why new businesses fail?
-no demand
-good idea, poor executed
-external shocks
what are financial reasons why established businesses fail?
-poor management of cash flow
-inadequate/inappropriate financing
what are non-financial reasons that established businesses fail?
-lack of management control
-significant external shock
why might a business have poor management of cash flow?
-holding too much stock (more than can be sold -> additional costs (warehouse rent, security))
-inadequate credit control (allowing customers too long to pay)
-bad debts incurred (some customer’s not paying their bills)
-inaccurate sales forecasting, break-even analysis or budgeting by management
why might a business have inadequate/inappropriate financing?
-use of short term overdraft for long term investment/capital spending
-inadequate shareholder capital all contribute to cash flow problems
-failure to use debt factoring when sales are substantially increasing
why might a business have a lack of management control?
-failure to develop a credible business plan
-failure to understand costs, markets and key customers
-failure to administer the company properly excessive or inappropriate market expenditure
