Influences in establishing an SME (business decline) Flashcards
factors that contribute to business decline
- failure to price product correctly
- unfavorable economic conditions
- failure to meet customers needs
- ignorance of existing competition
- lack of demand for the product
- failure to plan
- increased competition
- lack of adequate cash flow
- poor location
- ill-convened business
- lack of management skills
- uncontrolled growth
- failure to adapt changes in the external environment
lack of management expertise
when a business either fails to prepare a business plan or fails to keep modifying an existing plan as the environment changes, the stage is set for imminent failure
lack of sufficient money (under capitalisation)
many small businesses start out on a strict budget without sufficient capital and a positive cashflow the business will not be able to purchasestock and materials.
This inevitably results in lost sales and failing profits
internal reasons for cessation
- poor management
- inadequate planning
- inadequate cashflow and debt recovery
- weak location
external reasons for cessation
- red tape
- excessive competition
- natural disasters
voluntary cessation
- occurs when the owner ceases to operate their business on their own accord
- the business steps into operating because the owner may wish to retire, wants a change of lifestyle or in the case of a sole trader someone has died
- if the business is failing the over will usually cese the business to ensure there is not an accumulation of debt and they wont have to sell any assets
invoulantry cessation
- occurs when the owner is forced to cease trading by the creditors of a business (people or businesses who are owed money)
- as the business continues its decline, creditors become worried about the money they are owed and force the business owner into winding up the business
sole trader and partnership cessation
bankruptcy is the main cause of cessation for sole traders and partnerships
- bankruptcy is a declaration that a business or person is unable to pay his or her debts
- bankruptcy can either be voluntary or involuntary with either the business owner or creditor applying to a court for a bankruptcy order to be made
- realisation is the process of converting the assets of a business into cash is called realisation
company cessation (administration)
- voluntary administration occurs when an independent administrator is appointed to operate the business in the hope of trading out of financial problems
- the administrators main tasks are to bring the business and its creditors together and examine the financial affairs of the business
- if successful the business may resume normal trading
- if unsuccessful the business goes into liquidation
Example: toys R us
company cessation - liquidation
- occurs when the liquidator is appointed to take control of the business with the intention of selling all the companies assets in order to pay the creditors
- receivership is where a business has a receiver appointed by creditors or the courts to take the charge of the affairs of a business
Main features of liquidation:
- can be rearanged as the equivalent of bankruptcy
- results in the life of a company coming to an end
- normally occurs because the company is unable to pay its debts
problems arising for stakeholders in company liquidation (company directors)
- possible loss of directorship or disqualification as a director
- could loose personal assets to pay for the companies debts
- possibility of a fine or imprisonment
problems arising for stakeholders in company liquidation (creditors - unsecured)
- may not recover any of the money owed
- if there are funds left over the payment of the costs of liquidation and payments to other priority creditors such as employees, it may b possible to receive part payment for money owed eg 5 cents for every dollar owed
problems arising for stakeholders in company liquidation (employees)
- loss of jobs
- have the right, if there are any funds left over after payment of the liquidators fee to be paid there outstanding wages and super
problems arising for stakeholders in company liquidation (shareholders)
- unlikely to recive any payment
- the liquidator can request that holders of unpaid or partly paid shares in the company pay the outstanding amount on those shares
problems arising for stakeholders in company liquidation (society/economy)
- loss of production from liquidated companies
- social and personal difficulties associated with job losses
- loss of economic confidence
