Chapter 15-Reasons for

Busines Failure
Quote:
'You don’t have to be great to
start, but you have to start to be
great'
 Learning objectives
• Explain the reasons for business failure:
1. Cash-flow problems
2. Lack of finance
3. Not competitive
4. Failure to adapt to change in the
market
 Introduction
• Business fail for a variety of reasons
-One of the common reasons is money.
• Many business fail because they run out
of cash, even when they are potentially
profitable.
• Others fail because they did not raise
enough finance before trading began, or
they could not attract crucial funding at
a later date.
 Continuation...
• Entrepreneurs need to ensure that the
business has enough money exactly when
it is needed.
 1. Cash-Flow problems
• The are a number of reasons
why a business runs short of
cash. This include:
a. Overtrading
b. Investing too much in fixed
assets
c. Allowing too much credit
d. Over-borrowing
e. Seasonal factors
f. Unexpected expenditure
g. External factors
h. Poor financial management
 a. Overtrading
• This occurs when a business is
attempting to fund a large volume of
production with insufficient. This can
happen even if a business is profitable.
• The problem is that cash runs out while
it is spending money on resources to
meet a rising number of orders.
b. Investing too much in fixed assets

• Spending large
amounts initially on
equipment, vehicles
and other capital
items can quickly use
up resources.
• It may be better to
lease some of these
fixed assets to
protect cash
reserves.
 c. Allowing too much credit
• Businesses allow their customers too
long payment. This means that they are
waiting for money and may actually be
forced to borrow during this period.
 d. Over-borrowing
• Businesses may borrow to finance
growth.As more loans are taken out,
interest costs rise.
• To avoid over borrowing, a business may
try to raise more capital from the
owners-perhaps by selling shares.
 e. Seasonal factors
• Sometimes trade varies
for seasonal reasons. In
agriculture, cereal
farmers have a large
cash inflow when their
harvest is sold.
• The situation requires
careful management,
although it is possible to
predict these changes.
 f. Unexpected expenditure
• Business need to be
prepared for any
unforseen
expenditure
e.g.Equipment
breakdowns, tax
demands, strikes and
bad debts.
 g. External factors
• Sometimes events
that are outside the
control of the
business cause cash
flow problems
e.g.changes in
consumer tastes,
changes in legislation
or a downturn
economy.
 h. Poor financial management
• Inexperience in
managing cash or a
poor understanding
of the way cash
flows into and out of
a business may lead
to cash flow
problems.
 2. Lack of finance
• Both new and established businesses
may fail if they cannot attract funding.
• Established businesses may fail to get
funding because their track record is
poor and they therefore present too
much of a risk for investors
 Continuation...
• New businesses often struggle to
attract funding because they do not
have a trading history and they are too
risky for investor.This means they
might be undercapitalised-Starting a
business with insufficient capital.
 3. Not competitive
• Some businesses fail because they are
unable to compete effectively in the
market.
• There could be a number of reasons why
businesses eventually lose out to their
rivals. They include the following:
a.New entrants
b.ineffective cost control
 Continuation...
c. ineffective marketing
d. lack of business skills
e. poor leadership skills
 a. New entrants
• A business may begin successfully and
then fail because a new rival enters the
market and takes away their trade. This
is because competitors might:
 bring out superior products.
 read market conditions effectively.
 charge lower prices because their costs
are lower.
 Use destroyer pricing(very high
discounting)
 b. Ineffective cost control
• If costs are too high then a business needs to
charge more to make a profit. This might
result in loss of trade to low-cost competitors.
• A firm's costs might be higher than rivals for
a number of reasons:
 They may be too small to exploit economies of
scale.
 They may be wasteful
 it is possible that a business is paying too much
for some of its resources.
 Continuation...
 costs might also rise owing to external
factors.
 in some circumstances, a business might
not be minimising labour costs.
 c. ineffective marketing
• Businesses may struggle to compete if
their marketing is weak. Examples:
 a business might launch a new product
which fails to take off.
 a business might invest to heavily in
overpriced or inappropriate marketing
campaigns.
 a business might use an inappropriate
marketing strategy.
 Continuation...
 a business might use
inappropriate pricing
strategies which
could mean that
prices are too high
or too low.
 d. Lack of business skills
• Running a business is challenging and
requires many skills.
• Entrepreneurs have to be creative, good
with numbers, motivational and good
decision makers.
• Therefore, some businesses lack
competitveness and fail because their
owners are not sufficiently skilled.
 e. Poor leadership
• There have been cases where senior
managers and business leaders have
brought down companies by their actions.
• A business might lose its comptitive edge
in the market because the leader makes
a mistake. This could be the result of
poor decision making or a failure to make
urgent changes.
 4. Failure to innovate
• Some businesses collapse because they
fail to innovate -they do not change with
the times.
• They may have failed to adopt new
technology or to develop new products.
• Some are not prepared to take risk and
invest money-they are too cautious. As a
result they lose out to their more
innovative rivals.
End of the lesson