2.3.3. Business Failure

Question 1

Why might business fail?

Answer 1

Internal:
- lack of planning ( non- financial)
- cash flow problems ( financial)
- lack of funds ( financial)
- marketing problems (non- financial)
- poor leadership ( non- financial)

External:
- changes in legislation
- competition
- economic climate
- changes in market price

Question 2

Financial reasons for failure;

Answer 2

• poor cash flow management
• lack of funds to pay tax bill
• lack of capital = excessive borrowing
• borrowing from expensive sources ( overdraft)

Question 3

Poor planning ( internal):

Answer 3

• start ups don’t have business plan so more likely to fail as they lack direction
• new businesses should seek help from specialists ( especially when out comes to financial planning as that is the most common reason for business failure)

Question 4

Poor working capital management ( internal) :

Answer 4

• critical for a business to survive
• ## WC = a measure of efficiency that compares a businesses assets to its liabilities

Question 5

Poor cash flow management ( internal):

Answer 5

• Overtrading : the same as trying to expand too quickly and running out of cash.
• Investing too much in fixed assets : Buying lots of fancy fixed assets that don’t contribute to earning revenue can leave a business without cash.
• Allowing too much credit : Giving customers credit terms that don’t work for the business in order to establish a customer base is another common reason for new businesses failing. (Money should come in before it goes out,
  not the other way round.)
• Over borrowing : Taking on to many loans, where the combined interest is too high to manage.
• Unforeseen expenditure : Too many businesses fail to maintain contingency funds to deal with problems.

Question 6

Lack o business skills + poor leadership (internal) :

Answer 6

• owners don’t understand how to run a business
  Generally;
• lack financial skills
• don’t understudy the market
• don’t know how to manage people

Question 7

Strong Pound ( external);

Answer 7

• strong pound : manufacturing businesses who heavily export will be affected
  • 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