Why some businesses fail Flashcards
Why do some businesses fail?
Poor management: this is a common cause of business failure for new firms. The main reason is lack of experience and planning which could lead to bad decision making. New entrepreneurs could make mistakes when choosing the location of the firm, the raw materials to be used for production, etc, all resulting in failure
Over-expansion: this could lead to diseconomies of scale and greatly increase costs, if a firms expands too quickly or over their optimum level
Failure to plan for change: the demands of customers keep changing with change in tastes and fashion. Due to this, firms must always be ready to change their products to meet the demand of their customers. Failure to do so could result in losing customers and loss. They also won’t be ready to quickly keep up with changes the competitors are making, and changes in laws and regulations
Poor financial management: if the owner of the firm does not manage his finances properly, it could result in cash shortages. This will mean that the employees cannot be paid and enough goods cannot be produced. Poor cash flow can therefore also cause businesses to fail
Why new businesses are at a greater risk of failure
Less experience: a lack of experience in the market or in business gets a lot of firms easily pushed out of the market
New to the market: they may still not understand the nuances and trends of the market, that existing competitors will have mastered
Don’t have a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in the market. At a stage when they’re not selling much, they are at a greater risk of failing
Don’t have a lot of money to support the business yet: financial issues can quickly get the better of new firms if they aren’t very careful with their cash flows. It is only after they make considerable sales and start making a profit, can they reinvest in the business and support it
