Business failure Flashcards
Define business failure.
Business failure is when a business ceases to trade
It can also be when a business ceases to trade in a certain way, for example the BHS closure of shops, but the business continued online.
Why are some shops closing?
The Office for National Statistics says British online sales increased to 17.3% of all retailing in the year to April, from 16.1% the previous year.
Businesses providing services and goods that would be hard or impossible to supply over the internet - beauty treatments, tattooing, cups of coffee, and so on - have taken over hundreds of premises.
Retailers face increases in the National Living Wage and rising costs in sourcing goods, with the decline in value of the pound.
Consumers are looking for low costs and convenience leading them to shop online, leading to a trend in high street shops closing
List the different internal causes of business failure.
Poor efficiency Poor marketing Failure to innovate Bad management of working capital Lack of planning/business Lack of funds Narrow customer base
Explain poor efficiency as an internal cause of business failure.
For example, Modelzone closed with 9 million pounds of unpaid debt due to an aggressive and disastrous expansion plan.
Unrealistic sales forecasts led to over exapansion.
Explain poor marketing as an internal cause of business failure.
Businesses that launch new products that fail to meet customer needs are likely to stumble.
The use of inappropriate pricing strategies could mean that prices are too high or too low.
A business may invest too heavily in extravagant or inappropriate promotional campaigns.
Correct positioning in the market is also vital.
e.g. Sunny Delight marketed their juice as a healthy drink for kids, but it was actually pure sugar.
Explain failure to innovate as an internal cause of business failure.
Businesses need to keep up with the dynamic market.
eg. Blockbuster was a bricks and mortar video rental
Kodak knew digital cameras were coming, however did not move fast enough into the digital world
Explain bad management of working capital as an internal cause of business failure.
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 cash flow 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, often due to focussing too much on profit and neglecting the importance of cash.
Explain lack of planning/business as an internal cause of business failure.
At the start-up stage entrepreneurs can be prone to overlook the importance of planning. A thorough business plan is needed to provide a clear vision for the future so that owners can take an objective and critical look at the whole business idea, identify potential problems in advance so that the business is better prepared to deal with them.
Financial planning is crucial. Entrepreneurs need to ensure that the business is sufficiently funded to cope with weak cash flow in the initial stages.
Part of the planning process should involve seeking advice from relevant business people, potential investors and specialists. A range of courses are also available to help entrepreneurs in the setting up of a business.
Some small businesses fail because their owners may not be fully competent in the required skills.
Running a business is challenging and requires a multitude of skills. Entrepreneurs have to be creative, numerate, motivational and good decision-makers. They also need skills in communication, IT, marketing, negotiating, financial management and more.
Senior managers and business leaders may bring down companies almost single handedly with poor leadership (poor decision-making, not making urgent changes.) Failing to implement crucial strategies needed to protect their business from changes in the marketplace causes many companies to collapse.
Explain lack of funds as an internal cause of business failure.
Some businesses fail because they cannot attract funding.
Established businesses may fail to attract funding because their track record is not good, so they’re high risk for investors/lenders.
New businesses often struggle to attract funding because they do not have a trading history, so are too risky
Some business owners think they can survive with limited amounts of capital by being cautious. However, if a business is undercapitalised it is likely to fail.
Explain narrow customer base as an internal cause of business failure.
Some businesses rely too heavily on a small number of high-spending customers. Obviously, if they lose these large customers, sales will fall dramatically and survival becomes difficult.
Many farmers have gone out of business because they relied too heavily on contracts with large supermarkets. When terms for new contracts could not be agreed, farmers were left with an inadequate customer base.
List the reasons a business might run short of cash (working capital).
Overtrading Investing too much in fixed assets Allowing too much credit Over-borrowing Seasonal factors Unforeseen expenditure
Explain overtrading and poor management of working capital.
Young and rapidly growing businesses are particularly prone to overtrading. This occurs when a business is attempting to fund a large volume of production with inadequate cash. Established companies trying to expand can also face this problem.
Explain allowing too much credit and poor management of working capital.
A great deal of business is done on credit. One of the dangers is that businesses allow their customers too long for payment. This means that they are waiting for money and may actually be forced to borrow during this period. Failure to control debtors may also lead to bad debts.
Explain investing too much in fixed assets and poor management of working capital.
In the initial stages of a business, funds are limited. Spending large amounts at the outset on equipment, vehicles and other capital items drains resources. It may be better to lease some of these fixed assets, leaving sufficient cash funds.
Explain over-borrowing and poor management of working capital.
Businesses may borrow to finance growth. As more loans are taken out interest costs rise. This threatens a firm’s cash position and the overall control of the business. It is important to fund growth in a balanced way, perhaps by raising some capital.