ch 36 COPY Flashcards
What is meant by the term administration?
a failing business appoints a specialist to rescue the business or wind it up
what is meant by the tern over trading?
the situation where a business does not have enough cash to support its production and sales, usually because its growing to fast
what are internal reasons for business failure?
lack of planning
Cash flow problems
lack of funds
relying on a narrow customer base
marketing problems
failure to innovate
lack of business skill
poor leadership
how can lack of planning lead to business failure?
a thorough business plan will allow the owners to make an objective and critical look at the business ideas
it could provide a road map for development or identify that the business will not be successful and allow for either attractions or stopping before you start
of particular importance is financial planning, careful budgeting and cash flow analysis is required to ensure the business doesn’t run out of cash
seek advice from professionals
how can a lack of funding lead to business failure?
some businesses fail because the cannot attract funding, this issue can affect both established and new businesses
established businesses may fail to attract funding due to previous record of poor decisions making and financial track record . this could present too much risk for investors
new businesses may struggle to attract funding due to not having past records
what are the different factors that lead to cash flow problems?
overtrading
investing too much fixed assets
allowing too much credit
over borrowing
seasonal factors
unforeseen expenditure
external factors
poor financial management
how can over trading lead to cash flow problems?
take on too many sales
- purchasing too much and running our cash reserves too low
how can investing too much in fixed assets lead to cash flow problems?
could have leased
- take capital from the business
how can allowing too much credit lead to cash flow problems?
need the loyalty from the customers
- you may have sales but they may not pay you back
how can seasonal factors lead to cash flow problems ?
people forget their products seasonality
ice cream sales –> buy assets in winter not summer
will have a ‘cold’ period with low sales but still many outflows
how can unforeseen expenditure lead to cash flow problems?
may have not consider extra checks e.g. electrical wiring due to lack of planning
break-down of a major machine
how can poor financial management to cash flow problems?
-lack of experience may lead to poor cash flow management as they just dont know how to
how can lack funding lead to business failure?
Some businesses fail because they cannot attract funding. This issue can affect both established and new businesses.
Established businesses may fail to attract funding due to previous record of poor decision making and financial track record. This could present too much risk for investors.
New businesses may struggle to attract funding due to not having a past record!
how can marketing problems lead to business failure?
there are a range of reasons as to why businesses face problems with marketing
product fail to satisfy customers
inappropriate pricing structures
too much spent on promotional campaigns
how can relying on a narrow customer base lead to business failure?
Whilst operating in a niche market may allow you to develop a USP and differentiate yourself from your competitors, it may also mean that you’re limiting your potential customer base.
Alternatively, some businesses may set them selves up to service a small number of large businesses.
For example, a number of farming businesses have gone out of business because the were too reliant on contracts with supermarkets. When terms on new contracts couldn’t be agreed, due to the supermarkets squeezing margins, they didn’t have enough customers to sell their products to.
