Business Failure 2.3.3


Internal causes of business failure (Pt 1.)

INTERNAL FACTORS = factors businesses are able to control to cause it to collapse.

Lack of planning; Entrepreneurs can be prone to overlook the importance of planning. Financial planning = KEY. Entrepreneurs need to ensure that the business is sufficiently funded to cope with periods of weak cash flow.

Lack of funding; Established businesses may fail to attract funding because their track record is not as good as it needs to be, thus, they present too much of a risk for investors and other lenders. New businesses fail to attract funding because there is no trade history which again presents a risk to investors.

Marketing problems; Businesses that launch products that fail to meet customers needs are likely to stumble. Inappropriate pricing strategies may set prices too high or too low.

Failure to innovate; Some businesses may have been resistant to change and adopt new technology which can be seen to lead to slow growth which is not ideal in a dynamic market if you want to maintain a market share.

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Internal causes of business failure - cashflow

Overtrading; Business attempting to fund large volume of production with inadequate cash.

Investing too much in fixed assets; Spending large amounts at the outset on equipment, vehicles etc. can drain resources.

Allowing too much credit; Businesses allow their customers too long for payment = waiting too long for payments may lead to increased borrowing during this period.

Poor financial management; Inexperience in managing cash or a poor understanding of the way cash flows can lead to cash-flow problems.

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External causes of business failure

EXTERNAL FACTORS = factors beyond the control of the business to cause it to collapse.

Competition; Competitors may bring out superior products or read market conditions more effectively. Allowing them to charge lower prices as their costs are lower. (Undercutting.)

Changes in legislation; Changes in government legislation. Eg - number of failing pubs blamed the banning of smoking from public places for their demise. Increased costs.

Changes in consumer tastes; Businesses who cannot adopt changing consumer tastes are more likely to fail.

Economic conditions; General state of the economy both domestically and global can have an impact on the success of the business. (Financial crisis in 2008 led to higher levels of business failures). Changing levels of interest rates and exchange rates can also impact the business. (LOW interest rates makes borrowing CHEAPER) (HIGHER exchange rates means overseas customers have to pay MORE for UK goods).

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Financial and Non-financial factors

Financial factors: Businesses may become bankrupt (taken to court by creditors) or insolvent (business ceases trading on own accord). MOST COMMON = SHORTAGE OF CASH. -> Leads to the inability of immediately paying debts.

Non-financial factors: Non-financial factors such as lack of planning, inability to compete effectively, failure to meet customer needs etc. Can results in financial failure if they're not addressed by a business.

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