120

120 100

100 80

Business failure
80 60
Asia
60 40 Europe
America
40 20

Learning
20 Objective
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 Key Points (KP)
KP CONTENT

KP Internal causes of business failure

KP External causes of business failure

KP Financial and non-fi nancial causes of business failure

 Business failure in China
• Every year thousands of new businesses are
set up in China, but at the same time,
unfortunately, thousands of existing
businesses collapse.
• However, most business start-ups, possibly
in excess of 90 per cent, cease to trade after
five years. What is the cause of business
failure?
 Internal causes of business failure
Internal factors – factors that businesses
are able to control cause it to collapse. They
are:
1. Lack of planning: The failure of new
businesses in particular may be caused by a
lack of planning.
2. Cash-flow problems: Many businesses fail
because they run out of cash. In some cases
entrepreneurs focus too much on profit and
neglect the importance of cash.
 Continuation...
• There are a number of reasons why a
business might run short of cash:
Overtrading it the situation where a
business does not have enough cash to
support its production and sales, usually
because it is growing too fast.
Investing too much in fixed assets. It
may be better to lease some of these fixed
assets, leaving sufficient cash funds.
 Continuation...
Allowing too much credit.Failure to
control debtors may also lead to bad debts.
Over-borrowing. As more loans are taken
out interest costs rise. Overborrowing not
only threatens a firm’s cash position, but
also the overall control of the business.
Seasonal factors. Sometimes trade
fluctuates for seasonal reasons. This
situation requires careful management,
although it is possible to predict these
fluctuations.
 Continuation...
Unforeseen expenditure. Businesses need
to be prepared for any unforeseen
expenditure but for start-up business may
lack experience.
External factors. Sometimes events that are
outside the control of the business cause
cash-fl ow problems. Examples include
changes in consumer tastes.
 Continuation...
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.
3.Lack of funds: Some businesses fail
because they cannot attract funding. A lack
of funding can aff ect both established
businesses and new businesses. For
example, A lot of businesses failed during
the ‘credit crunch’ just after the global
financial crisis in 2008.
 Continuation...
4.Relying on a narrow customer base. This
means they rely too heavily on a small
number of large customers.
5.Marketing problems: For example, the
use of inappropriate pricing strategies could
mean that prices are too high or too low.
6. Failure to innovate: In some cases
businesses have failed because they have
resisted the need to innovate and not
changed with the times.
 Continuation...
7. Lack of business skills: Inevitably some
small businesses fail because their owners
may not be fully competent in the required
skills. Running a business is challenging
and requires a multitude of skills.
8. Poor leadership: Senior managers and
business leaders may bring down
companies almost singlehandedly. Such
failures are often reported as the result of
poor decision-making and not making
urgent changes.
 External causes of business failure
• External factors – factors beyond the control
of businesses cause it to collapse.The most
likely external factors to cause business
failure are:
1. Competition: The strength and success of
business rivals can push others out of
business through superior product or low
products.
2. Changes in legislation: Sometimes
changes in government legislation can lead to
business failure.
 Continuation...
3. Changes in consumer tastes:
Consumer tastes are not constant. They
are likely to change over time and
businesses that cannot adapt to such
changes are more likely to fail.
4. Economic conditions: The general state
of the economy, both domestic and global,
can have an impact on the success of
businesses.
 Continuation...
• Changes in market prices: Some
businesses have very little control over the
prices they charge. In certain industries firms
are ‘price takers’. For example, oil producers
have to sell their output at the global market
price. Consequently, when these prices fall,
marginal producers will leave the market.
 Financial and non-financial
causes of business failure
• Financial factors: Many businesses fail
for fi nancial reasons. They either become
bankrupt (where they are taken to court by
creditors) or they become insolvent (where
they cease trading of their own accord).
The most common reason for this failure is
the shortage of cash – the inability to pay
immediate debts.
 Continuation...
• Non-financial factors: In some cases
business failure results from factors such
as a lack of planning, a lack of business
skills, inability to compete eff ectively,
failure to meet customer needs, reluctance
to change and adverse economic
conditions. These may be classified as
non-financial factors as they are not linked
directly to money issues.