2.3.3 Business Failure Flashcards
list some marketing or strategic problems that can cause major issues within a business
-poor market research, not understanding consumers
-failing to differentiate from rivals
-failing to communicate the uniqueness of their product or service to customers
-poor leadership or management
-external shocks such as economic change or legal and social change
where is the highest rate of failure?
amongst new businesses (start-ups)
why do start-ups have the highest rate of failure?
-difficult to test a business model without trading
-easy to be over-optimistic in the business plan
-competitor response is often aggressive
-management may lack experience (lose control)
financial reasons for why established businesses fail?
poor management of cash flow
inadequate or inappropriate financing
evidence of poor management of cash flow…
-significant increases in stock levels
-no credit control
-bad debts incurred
-inaccurate forecasting by management
-failure to plan for significant capital and/ or exceptional expenditure
evidence of inadequate or inappropriate financing….
-using short-term overdrafts for long term investment or capital spending
-not using debt factoring when sales are increasing a lot
-bad shareholder contributions to cash flow problems
non-financial reasons for why established businesses fail?
lack of management control
significant external shock
evidence of lack of management control….
-failure to develop a good business plan
-failure to understand costs, markets and key customers
-inability to administer the business properly
-excessive marketing expenditure
evidence of a significant external shock…
-loss of important or major customer (B2B)
-sudden decline in market demand
-change in legislation impacting demand or increasing costs
how can marketing mistakes lead to business failure?
spending lots of money on marketing or campaigns that don’t end up being successful can result in a loss in revenue, as they cannot afford this
e.g. products not meeting expectations, market research overestimating demand, setting low prices that do not cover costs
how do great business leaders ensure their business survives changes in the external environment?
-have backup cash which can be used in an emergency of shock
-insurance for certain situations
-listening to employees with good customer insight and knowledge
-have a multi-diverse business as these are less likely to fail
what is the connection between the current ratio and business ratio?
having a CR of under 1.5 can result in failure
over 1.5- 2 :1 is ideal
-need to have enough assets to cover all liabilities and spare cash
-a bad CR indicates poor working capital and bad cash flow management
why might a growing market lead to business failure?
more competitor enter the market making it hard to compete if they have much lower costs
overtrading may rack up costs before revenue or profit is received
a business may be too stubborn to change according to the fast growing market
