Causes Of Business Failure

Causes of Business Failure The following are some possible causes of business failure. •

Cash flow problems

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Poor business planning

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Fall in demand for the product

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Rise in costs or a lack of control of costs

Cash Flow problems For many small and newly formed businesses, this is often the single most important reason for business failure. The problem arises when the money coming into the company from sales is not enough to cover the costs of production. It is important to remember that it is a case of having the money to be able to pay debts when the debts are due, not simply generating enough revenue during a year to cover costs. Poor Business planning Many new businesses will have to put together a business plan to present to the bank before it receives loans or financial help. The time and effort put into these plans is crucial for success. Bad planning or poor information on which the plan is based is likely to lead to difficulties for the firm. For example, if the firm plans to sell 2,000 units per month in the first year because it used only limited market research and ends up only selling 500 per month, it will soon be in serious danger of collapse. Fall in demand for the product There are a number of reasons why demand might fall. Some of these might be to do with the business taking their eye off the ball and not paying sufficient attention to their customers' needs - perhaps the product is not up to scratch, perhaps the quality is poor, maybe the price is too high - most of these things are within the businesses control. Falling sales might be a sign that there might be something wrong with the product or the price or some other aspect of the marketing mix. Sometimes the fall in sales might be as a result of the competition providing a better product or service - in part the business can do something about this they have to recognise it in the first place. Rise in costs or a lack of control of costs Costs of production can rise for a number of reasons. There may have been wage rises, raw material prices might have increased (for example the price of oil or gas), the business might have had to spend money on meeting some new legislation or standard and so on. In many cases, a firm can plan for such changes and is able take them into account but if the costs rise unexpectedly, this can catch a firm off guard and tip them into insolvency. Business failure occurs when your business has reached a point (commonly insolvent) where it can no longer continue trading without encountering further problems. These problems may offer no feasible solutions and by continuing to trade, you put yourself in deeper trouble. At this point, it is important that you accept business failure early or you will face increased financial and legal problems when you try to save your business or put it to rest. Business failure does not always occur because of problems in your own business, but can be achieved as a knock-on effect from actions made by other businesses, suppliers and customers. It is therefore important that you recognize the early signs of business failure before it is too late for the situation to be resolved Business failure, or colloquially going out of business, refers to a company ceasing its operations following its inability to make a profit or to bring in enough revenue to cover its expenses. REASONS Some businesses fail early on. This can occur as a result of wars, recessions, high taxation, high interest rates, excessive regulations, management decisions, insufficient marketing,

inability to compete with other similar businesses, or a lack of interest from the public in the business's offerings. As well, some firms can be sold to another owner, or merged with another firm. Some businesses may choose to shut down prior to an expected failure. Others may continue to operate until the very last day before they are forced out by a court order. Yet with some small businesses, the owner may voluntarily cease operations not due to financial constraints, but as a result of a personal decision, such as retirement. After closing, a business may be dissolved and have its assets redistributed after filing articles of dissolution. A business that operates multiple locations may continue to operate, but close some of its selected locations that are under-performing, or in the case of a manufacturer, cease production of some of its products that are not selling well. Other failing companies may be purchased by a new owner who may be able to run the company better, or else merge with another company that will then take over its operations. Yet some businesses may be able to save themselves through bankruptcy or bankruptcy protection, thereby allowing themselves to restructure. CAUSES In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction.[1][2] During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence). Strike action, often simply called a strike, is a work stoppage caused by the mass refusal of employees to perform work. A strike usually takes place in response to employee grievances. Strikes became important during the industrial revolution, when mass labor became important in factories and mines. labor cost -wages paid to workers during an accounting period on daily, weekly, monthly, or job basis, plus payroll and related taxes and benefits (if any). Legislation (or "statutory law") is law which has been promulgated (or "enacted") by a legislature or other governing body. The term may refer to a single law, or the collective body of enacted law, while "statute" is also used to refer to a single law. Before an item of legislation becomes law it may be known as a bill, which is typically also known as "legislation" while it remains under active consideration. Legislation can have many purposes: to regulate, to authorize, to provide (funds), to sanction, to grant, to declare or to restrict. The act of law making is sometimes known as legislating. Under the doctrine of separation of powers, the law--making function is primarily the responsibility of the legislature. However, there are situations where legislation is enacted by other means (most commonly when constitutional law is enacted). These other forms of law-making include

referendums and constitutional conventions. The term "legislation" is sometimes used to describe these situations, but other times, the term is used to distinguish acts of the legislature from these other lawmaking forms, which have been scaled down.

At the turn of the millennium a host of new .com businesses were launched in this country based on the hype associated with having an 'online presence'. A large number of these businesses were based on good ideas - e.g. retailing wine, clothes and financial services on the Internet.

FIRM

However, what many of these businesses lacked was an established trade name, which the general public was familiar with.

the members of a business organization that owns or operates one or more establishments; "he worked for a brokerage house" unwavering in devotion to friend or vow or cause; "a firm ally"; "loyal supporters"; "the true-hearted soldier...of Tippecanoe"- Campaign song for William Henry Harrison; "fast friends" Business failure Poor marketing Successful modern businesses are ones that understand and meet the requirements of their customers. Detailed market planning and market research is therefore an essential for new businesses, to find out details such as the potential size of the market, the extent of competition, as well as consumer preferences and tastes. Cash flow problems Many businesses struggle through poor cash flow management. It is all very well having a good idea and a good product but it is also necessary to be able to meet short term outflows. Many businesses try to grow too quickly, and end up borrowing too much money externally, resulting in crippling interest repayment charges. Poor business planning Business planning should cover aspects such as marketing, finance, sales and promotional plans, as well as detailed breakdowns of costings and profit predictions. It is often said that 'failing to plan, is planning to fail'. Lack of finance Insufficient finance often means that businesses are unable to take opportunities that are available to them, or have to compromise - going for high cost solutions to problems, rather than lower cost ones that would yield greater competitive advantage. Failure to embrace new technologies and new developments In a fast changing world leading businesses are ones that make best use of advanced modern technologies in an appropriate way. Firms that operate with outdated technologies and methods frequently find themselves at a cost disadvantage over more dynamic rivals. Poor choice of location Location is a very important business decision. A good location is one that appeals to large numbers of customers, while at the same time minimising costs. For example in retailing it is often a mistake to choose a low cost location, that is not visible to customers. However, conversely there are considerable cost advantages to out-of-town retailers that customers are prepared to travel to visit. Poor management Weak and inexperienced management is one of the major causes of business failure. Managers have to work extremely hard, and to understand their customers needs, and the business that they are in if they are to be successful. Poor human resource relations Are often a cause of failure. Successful businesses motivate their employees to work hard to help the business to succeed. Lack of clear objectives Successful organisations have clearly focused and communicated objectives that enable everyone in the organisation to pull in the same direction. Brand names

The major companies that we are familiar with - Coca-Cola, Cadbury Schweppes, Nestle have taken years to build their brand names. Many of the new .coms were seeking to build brand awareness very quickly. These companies were able to raise relatively large sums of capital to set up. However, advertising and promotional costs were substantial, and the pool of capital they started up with rapidly began to run out before they could make the breakthrough to profitability. What we then saw was a high level of business failure in 2000 and 2001 among the new .coms. Although many of their ideas were good they ran into cash flow problems. In the end the prime beneficiaries of the .com revolution were existing companies with well established brand names that were able to embrace the new technologies.