Surname 1

Name:
Instructor:
Course:
Date:
Argumentative essay on "why do businesses fail?"
Introduction
There are over 28 million small businesses in the United States, and only about 50% of them
survive. It is no secret that most businesses fail in the first five years. The question is: Why do
they fail and what can be done to prevent these problems in a business? Most entrepreneurs
charge into a market with high hopes, only to see their businesses fail right before their eyes. The
main reasons why businesses fail is a lack of planning. Its not the plan that is important, its the
planning (Dr. Graeme Edwards). It is critical that all businesses have a set business plan. A great
business plan must consist of accurate and current information, with a clear and realistic vision
of future projections. The business plan is the main building block to starting and maintaining a
successful business. Along with a strategic business plan, a need for strong management is key
for a successful business. More often than not, new business owners frequently lack relevant
business and management expertise. Unless business owners identify what they do not do well
and seek help in those areas, they are setting the business up for disaster. New businesses fail due
to poor management, inadequate of poor finance, market vagaries, poorly trained employees, and
burden regulatory environment.
Poor management

Surname 2

Poor management is the common reason for failure. Entrepreneurs or business founders are
usually persons with a great interest in their field and, therefore, start a business to fill a niche or
serve an unmet need in the market. Consequently, they are specialists in product or service their
firm offers. Also, most owner/managers are good at selling their product or service. However, the
success of a business does not only depend on selling, or having a detailed knowledge of product
information or service (Ucbasaran, Westhead, Wright and Flores 550).
Management skills are crucial, and this is where most owners of businesses fall short. Skills in
management are needed to develop strategy, business planning, managing employees, and
training and development. Without a strategic direction, which is achieved through planning, it is
not possible to grow a small business to the next level. In the majority of cases, business owners
do not intend to grow their business beyond the current level, as their interest is just keeping the
business going. Lack of long-term thinking creates instability in the business and employees fear
insecure about their jobs. The more ambitious and talented employee leave in search of better
opportunities elsewhere where they are likely to grow their careers (Robb and Robinson 56).
With the loss of good and competent employees, it is much harder for the firm to succeed. If
good employees do not leave the firm, they find it hard to make a tangible contribution to the
management of the business as owner/managers are very independent, which makes them
impervious to good advice from employees or outsiders.
Finance
Finance difficulties present another major cause of failure. Owners of businesses sometimes
invest all, or significant part, of their lifes savings. However, success requires good financial
management without which even the most capitalized business will fail. Financial difficulties are

Surname 3

caused by several factors. The first cause of failure is poor accounting and financial management
(Townsend, Busenitz and Arthurs 200). Financial management is a crucial skill but
owner/managers are often deficient in this area.
Financial management skills, as demonstrated in the use of financial statements in making
decisions, are useful in making the right decisions. Financial statements provide a reliable
indicator on how well the firm is using resources at its disposal. The statements also provide an
indication concerning compliance with law and especially taxation (Kim 370). It is possible to
calculate liquidity status of a firm based on the information in the balance sheet. Liquidity is a
measure of reliability. Efficiency ratio measures how well a business is converting resources into
revenue. Financial statements also indicate whether the business is making profits or not. A
business that is not making profits cannot meet its financial obligations.
One of the most important financial indicators of a business success is cash flow. Cash flow is
critical for the survival of a business, and even a profitable business can fail without access to
cash. The ability to access cash is dependent on the business relations with creditors and banks.
How a business relates with the two is an important indicator of stability (Geroski, Mata and
Portugal 50). If the business has excessive inventory, has given out too much credit, and has
prepaid too many items, it is likely to suffer from cash flow problems. In such a situation is
bleeding more cash than it is getting from its operations. Business owners tend to make mistakes
regarding cash flow due to poor financial management skills. In the quest to maintain relations
with new customers, the business may give too much credit with long repayment period, which
causes cash flow problems. Importantly, some owners are not even aware of how such decisions
affect their bottom-line.

Surname 4

If money flows into a business at a slower rate than the rate of payment, then the business will
soon have to rely on borrowing. Small businesses often have poor access to credit, meaning they
rely on their customers to pay promptly for their business to remain in operation. If customers
are getting products and services but are not paying quickly enough, most small businesses fall
into cash flow problems, affecting their ability to pay suppliers, rent, rates, wages, and even
compromise the ability of the business to serve customers well according to their expectations.
When customers make new orders, owners often fail to communicate their terms of conditions,
such as repayment period and penalties for late repayment. Failure to state these conditions
assertively create problems later (Geroski, Mata and Portugal 45).
Owners/managers price their products poorly. On paper, the selling price of an item may appear
good, but without doing the math, and include a cost to the final price; a business may price its
products too low. It requires substantial sales to cover overheads alone. For sales to be profitable,
a business must price its products or services appropriately and avoid the temptation to compete
on prices. Another problem is selling more products and services beyond the working capital,
something that stretches the capacity of the business resulting in cash flow problems.
The main source of capital for new businesses is the own investment made by the founder or
owner. Often, the working is not enough especially if businesses start to do well. To cope,
businesses have to rely on overdraft, which is a form of an expensive loan. Taking loans is
burdens the business. For those businesses with a potential for success, the owners avoid taking
loans or investments from outsiders for fear of losing independence (Rahaman 23). They fail to
appreciate that success of a business, even with a solid business model, is dependent on the
amount of finance available. Bank overdrafts are a short-term solution to a long-term problem of

Surname 5

insufficient working capital, which can be solved by getting a long-term loan or inviting
investors.
Market
The third major cause of failure is market vagaries. The market is unpredictable and sometimes
unstable. Market tastes changes often, meaning what is in vogue now may change all of a
sudden. The unpredictability of the market is also influenced by technology, which brings what is
referred to as creative destruction. New technology may introduce a new model for a product or
service, which is more receptive to customer needs. In such a situation, existing businesses in an
industry affected suffer. The product designed may not be appropriate for the market or targeted
customer group. In some cases, the product may be appropriate for the targeted customer group
but too niche, making is impossible to make enough sales generate respectable profit (Rand 11).
Consumers may not be interested in a product or service.
Training
Lack of proper training impedes the ability of managers and employees to perform their business
activities properly. The quality of human resource determines productivity and overall
organizational performance. Effective training provides firms with a unique, differentiated
position they can use to improve the product and services offered to customers. Investing in
training and development is equivalent to investing in the future of the firm as returns of the
investment are recouped in form of increased productivity, profitability, and continual innovation
(Shane 22). In the quest for improving the quality of human resource, the most important
consideration is the cognitive ability of employees. It is easier to train employees with proven
cognitive ability.

Surname 6

Given the importance of training, small firms fail to train their stuff for a variety of reasons,
which include lack of spare time, the need to cut down on cost, and the feeling that employees
will use additional training to exit the firm and explore opportunities elsewhere that are more
lucrative. Being small in itself is not a good thing. The number of employees is small; hence,
employees have more responsibilities. A manager may not have the time to spare to train
employees. Secondly, small businesses by definition are small, with limited resource base and,
therefore, cannot afford to fund employee-training programs. In this scenario, some businesses
may opt to hire experienced employees already but with a limited resource base, it is still harder
to attract them. In technology firms, the solution is involving employee in financial matters such
as involves participation in profits, through individual shares in equity and employee stock
options, to employee ownership systems like ESOPs (Watson 270).
The basic idea behind including employees in such schemes is making them co-beneficiaries,
which in turn creates a sense of shared responsibilities. In small companies such as technology
startups without the resources of large companies, it is hard to attracted highly rated engineers,
whom such a firm needs to produce excellent products. In such a situation, viable ways of
attracting engineers, or even poach them from established companies, is through financial
participation schemes. When employees know that by working with a startup, they stand a
chance of ownership shares in highly valued startups, they are likely to commit themselves even
when the salary is not that good (Arasti, Zandi, and Talebi 23).
Legislation
Another common but less appreciated source of failure for small businesses is the inability to
comply with appropriate legislation. Some industries such as financial and insurance industries

Surname 7

are heavily regulated, which creates an enormous burden of filing the forms and staying relevant
on appropriate legislation. Like the large firms, the law requires smaller firms to comply with the
law but smaller firms have limited resources, which makes the legal demand escalate
administration costs. Some small businesses are established to serve small markets, and legal
changes may eliminate a market or make it untenable to continue serving it.
Is business failure unavoidable?
The failure of new businesses is too high and this gives rise to the question: is failure
unavoidable. People like Joseph Schumpeter, the Austrian economist, believed that such failures
are an inevitable part of creative destruction, which must happen in the capitalist market.
However, while the argument is valid, the market is less than perfect. Some new businesses fail
in a field where customers are overcharged for poor service or people do not get service at all.
Clearly, some of the services of businesses that fail are needed. In the majority of cases, failure
of new businesses is due to poor management skills of owners and other reasons discussed
above. By focusing on the right things, the owners/manager can increase the chances of their
business success. In realization of the structural obstacles such as unsupportive legal
environment, governments such as the American government have passed laws that include
Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR)
which are meant to offer support to new businesses.
Conclusion
Small and medium enterprises are important to the economy because they provide goods and
services and create jobs. According to statistics, about a half of America GDP is produced by
small businesses and 53 percent of workforce work in companies classified as either small or

Surname 8

medium. After the financial crisis of the 2007/2008, the main driver of job creation was small
enterprises. Small enterprises are innovative, and some statistics indicate that 99 percent of
American businesses are small. Small businesses are therefore critical and cannot be ignored.
However, despite their importance, they face a myriad of challenges. The main challenge is the
high failure rate. Within a year, most of new businesses fail and the remaining fail in subsequent
years. The biggest question is what the actual cause of the high failure rate is. As this paper
discusses, the main causes of failure are poor management, inadequate of poor finance, market
vagaries, poorly trained employees, and burdensome regulatory environment. Prospective
entrepreneurs and business owners should carefully consider the common issues that cause
failure, and this is why business planning is crucial as it forces owners to think through some of
these problems. Governments also need to play their part and create a supportive environment
for success.

Surname 9

Works Cited
Arasti, Zahra, Fahimeh Zandi, and Kambeiz Talebi. "Exploring the Effect of Individual Factors
on Business Failure in Iranian New Established Small Businesses." IBR International
Business Research 5.4 (2012). Web.
Geroski, P. A., Jos Mata, and Pedro Portugal. "Founding Conditions and the Survival of New
Firms." Strat. Mgmt. J. Strategic Management Journal (2009). Web.
Geroski, P. A., Jos Mata, and Pedro Portugal. "Founding Conditions and the Survival of New
Jebe, Ruth. "Will Business Do Anything for Money?: Carrot Mobs and Sustainabilty in
Small Businesses." SSRN Electronic Journal SSRN Journal. Web.
Kim, Grace O. "Do Equally Owned Small Businesses Have Equal Access to Credit?" Small Bus
Econ Small Business Economics 27.4-5 (2006): 369-86. Web.
Rahaman, Mohammad M. "Bad Luck or Bad Policy: Why Do Firms Fail?" SSRN Electronic
Journal SSRN Journal. Web.
Rand, Tom. "Why Businesses Fail: An Organizational Perspective." Emergence 1.4 (1999): 97114. Web.
Robb, Alicia, and David Robinson. "The Capital Structure Decisions of New Firms." (2010).
Web.
Shane, Scott. "Why Encouraging More People to Become Entrepreneurs Is Bad Public Policy."
Small Bus Econ Small Business Economics 33.2 (2009): 141-49. Web.
Townsend, David M., Lowell W. Busenitz, and Jonathan D. Arthurs. "To Start or Not to Start:
Outcome and Ability Expectations in the Decision to Start a New Venture." Journal of
Business Venturing 25.2 (2010): 192-202. Web.
Ucbasaran, Deniz, Paul Westhead, Mike Wright, and Manuel Flores. "The Nature of

Surname 10

Entrepreneurial Experience, Business Failure and Comparative Optimism." Journal of

Business Venturing 25.6 (2010): 541-55. Web.
Watson, John. "Failure Rates for Female-Controlled Businesses: Are They Any Different?"
Journal of Small Business Management J Small Business Management 41.3 (2003): 26277. Web.