Failure of Business Enterprises;

Caused by Productivity or Management?

RAJKOOMAR Manish

Table of Contents
Definition of Business Failure .......................................................................................................3 Closures and Failures: The Numbers ...........................................................................................3 Reasons For Business Failures ........................................................................................................ Failure Due to Production Related Issues ....................................................................................4 Failure Due to Management Related Issues .................................................................................5 Recovering From Business Failures .............................................................................................8 Conclusion ......................................................................................................................................9 References .....................................................................................................................................10

Definition of Business Failure Business failure is defined as the termination of a business that results in financial loss for at least one of the business's creditors. All entrepreneurs who decide to establish their own business face the possibility of failure, and a good deal of sources holds that failure is not only possible but probable for the small business owner seeking to launch his or her own enterprise. It has long been said that four out of five new businesses fail within five years of their establishment, for instance, but current studies indicate that such gloomy forecasts often present a false picture of entrepreneurial realities. Indeed, many business experts that the majority of small business owners are actually successful with their ventures. , The US Chamber of Commerce - published newsletter; Nations Business pointed out "Outright failures of small businesses are in fact remarkably rare." Moreover, Nations Business explained that "if failure is defined, reasonably enough, as a business closing that results in losses to creditors because the firm files for bankruptcy or because it simply closes its doors without paying its debts."

Closures and Failures: The Numbers In 2002, 22.98 million businesses operated in the United States, but the overwhelming majority of these were enterprises without employees. The U.S. Census Bureau maintains data on the closure of businesses with employees (a universe of 5.66 million firms) but without specifying the cause of the closure. Dun & Bradstreet Corporation tracks business failures, but its database clearly includes some one-person corporations. The Census Bureau data, available from the U.S. Small Business Administration on its Web page titled "Firm Size Data," shows that in 2002, 586,890 firms with employees closed their doors; 569,750 businesses were launched. The Census refers to these as "deaths" and "birth." In most years births outnumber deaths by a small margin; 2002 was an unusual year. In 2001, a much more typical year, 553,291 firms closed their doors and 585,140 were started, a net gain of 31,849.

Reasons for Business Failures 1. Due to Low Productivity and Productivity related Problems 1.1 Poor or low quality of products for sale

Another possible factor that may lead to the failure of a business enterprise could be poor or low quality of the products in terms of customers expectations as well as the competing products. This will reduce the number of customers as they withdraw and go to other businesses, which are producing better quality products. Faced with a declining number of customers and increasing competition, the business will inevitably fail and close. 1.2 Lack of market for the business products

If nobody wants to buy the products (goods and services) of a business then the business will fail and close. While there are several reasons for the lack of market, the most common ones include competition, changing customer tastes, uncompetitive prices, etc.

2. Due to Management 2.1 Poor Management

Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. Unless they recognize what they don't do well, and seek help, business owners may soon face disaster. They must also be educated and alert to fraud, and put into place measures to avoid it. Neglect of a business can also be its downfall. Care must be taken to regularly study, organize, plan and control all activities of its operations. This includes the continuing study of market research and customer data, an area which may be more prone to disregard once a business has been established. A successful manager is also a good leader who creates a work climate that encourages productivity. He or she has a skill at hiring competent people, training them and is able to delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future.

2.2

Lack of Planning

Anyone who has ever been in charge of a successful major event knows that were it not for their careful, methodical, strategic planning -- and hard work -- success would not have followed. The same could be said of most business successes. It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future. Components may include:

Description of the business, vision, goals, and keys to success Work force needs Potential problems and solutions Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast

Analysis of competition Marketing, advertising and promotional activities Budgeting and managing company growth

2.3

Deterioration in Customer Base

This can happen for any number of reasons, including poor service, high prices, and new competitors. Making improvements in products/services offered, marketing, inventory, customer service, and work force personnel can all do a great deal to halt deterioration in customer relations.

2.4

Poorly Conceived Business Expansion

"Every business owner wants to grow his or her business, but expanding with no infrastructure in place makes a business ripe for failure," wrote Tonia Shakespeare in Black Enterprise. "You can incur tremendous losses when you expand outside your core market. Not only is the physical aspect of expansion costly but there are different buying habits in different geographical locations. If you venture into an area outside your home turf, you had better prepare by doing a lot of research."

2.5

Cash Flow Difficulties

Poor cash flow kills thousands of small businesses every year. "Most business owners don't realize how much money it takes to run a business," wrote Shakespeare. "Understand what it takes to get a revolving line of credit before you start your business. It's always easier to get money when you don't need it, so don't wait until you're desperate. Develop your business plan using conservative projections and don't be overly optimistic." Shakespeare warned that profitable, fast-growing businesses can also run into cash crunches that can ultimately lead to bankruptcy. "That's why ongoing cash-flow analysistracking the money coming in and going out of the businessis a must."

2.6

Poor management of business stocks

Failure to maintain the adequate quantities of stocks in the shop will drive away customers, since other competitors will always be more than ready to serve them. When customers miss to get a particular kind of commodity more than once, from a business, which used to supply them, they will look elsewhere for alternatives, and with time, such customers will be attracted to those businesses from which there is always ready supply of commodities.

2.7 Misuse of business funds One very big factor that can lead to the failure of a business is the diversion of the business funds to other purposes that may not necessarily be in line with the operations of the business. This will inevitably reduce the working capital, which is the lifeblood of the business. As a result, there will either be little or no funds left to finance the business operations like purchasing raw materials, and meeting the daily expenditure of the business enterprise. RECOVERING FROM BUSINESS FAILURE Business failure is usually a demoralizing event in a person's life because it impacts both professional and personal self-esteem. Indeed, many experts believe that the entrepreneur who experiences a business failure goes through many of the same stages as individuals who suffer from the loss of a friend or loved oneshock, denial, anger, depression, and acceptance. But observers are quick to point out that people who experience business failure can still go on to lead rewarding professional lives, either as part of another company ordown the linein another entrepreneurial venture.

Conclusion In some instances, entrepreneurs lose interest in business because it does not suit their personal characteristics and as such, they slacken in their commitment to it in terms of supervision, funding, initiative and creativity. As a result, the business looses direction and collapses. Business failure cannot be solely attributed to either low productivity, or poor management, but both contribute to its utter collapse.

References http://www.elateafrica.org [Accessed on 01 May 2012] http://www.referenceforbusiness.com/ [Accessed on 30 April 2012] Image Reference http://strategicdiscipline.positioningsystems.com [Accessed on 03 May 2012]

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