Business failure

From CEOpedia | Management online

Business failure is a situation when a certain company, firm or any other kind of business has to cease operations due to financial difficulties. If a business does not remain profitable and is in a position that is not earning enough to cover its expenses, it can be considered a failure. Inadequate profit is considered normal at the start of a business but it is not sustainable in the long term and can be disastrous for any kind of business. In fact, a large number of new businesses fail shortly after launch, while a good deal of failures occurs at later stages in the business life cycle. A significant shortfall in cash flow reduces the ability of the company to respond to outside problems or threats. This delayed response often results in the catastrophic failure of the business[1] Small businesses with no financial back up are more prone to failures. Business failure is not limited only to organizations as a whole, because for big organizations certain products can also result in failures, an example would be the decline of BlackBerry after the introduction of the iPhone.

Causes of business failure

In business there is a very thin line. The line between success and failure. When the company crosses the line, it may fail. Literature reveals many different failure predictions based mostly on financial indications. The collapse of business may be caused either by an internal factor for the business or the external environment. External causes might be hard to predict, while internal factors are possible to forecast in advance. Business can fall not only as a result of the recession, taxation, regulations, or high-interest rates but also because of insufficient marketing, poor management decisions, impossibility to compete with other bigger or similar businesses, or no public interest in the business products. Referring to literature reasons for business failure might be grouped into 4 different categories [2]:

  • Firm-specific
  • Industry-specific
  • Macro-economic
  • Geographic and special factors

To the main reason for small business failure we can include:

  • Low sales
  • Unexpected growth
  • Poor location
  • Lack of experience
  • Using funds for personal needs
  • Poor head management
  • Poor inventory management
  • Over-investment in fixed assets
  • Insufficient capital
  • Competition

Nowadays one of the biggest barriers in business development are excessive regulations and lack of institutional support. The real problem became a bureaucratic process and administrative regulations. Another important problem for businesses to deal with are liquidity constraints. Most of the companies report indicate financial problems as the main reason for their business failure. Before starting a business, it is needed to consider both personal living and business expenses. A common mistake among businesspeople is a lack of business experience and knowledge. It is important to rely on business advisors, safety consultants, accountants, lawyers, and give employees responsible authority. Necessary for success is clearly understand and define the market, customers, and their buying habits.

Prevention of business failure

Although there are no hard and fast rules for the prevention of a business failure, researchers point out some attributes that most successful businesses possess. Some of them are[3] :

  • A set business plan and mission statement. Once a company has its goals and objectives defined, everyone associated with it can work in order to achieve the aspirations.
  • Customer profiling. A very important thing for a business is to know who its customers are. Once it is established, the organization can specifically target that specific group and get great results.
  • Awareness of competitors. Only a handful of new businesses are unique, so most come up with a slightly different version of an already existing business. Which makes it ever so important to know who you are competing against. A successful business understands its competitors well and reacts effectively.
  • Networking with other business owners. Getting to know other people in the same field of work can sometimes make life easier as you can share and discuss your problems because they are mostly quite similar.
  • Innovative marketing strategies. This can actually make or break a business. An excellent marketing campaign can make a business successful overnight, whereas it could also result in terrible loss. Hence, the organization needs to come up with innovative marketing methods and target its customers effectively.
  • Awareness about government schemes and support. Governments can sometimes come up with business-friendly schemes, so being up to date about it would always be a plus.
  • Strong organizational structure. Solid leadership and very organized hierarchical set up will give a good impression to both customers and employees.
  • Think ahead and plan for the unexpected. Planning for the future and preparing for the unexpected will make the business ahead of its competitors. Even though it is not an easy thing to do but it has been seen that businesses that aim for the future are always ahead of others.

Footnotes

  1. ↑ Platt H., (1999), Why Companies Fail, Beard Books, Washington, D.C.
  2. ↑ Maoh H., Kanaroglou. P, (2017), Business establishment mobility behavior in urban areas: a microanalytical model for the City of Hamilton in Ontario, Canada, "Journal of Geographical Systems", 9(3):229-252
  3. ↑ Abrams R., (2013), The Successful Business Plan: Secrets & Strategies (Successful Business Plan Secrets and Strategies), thePlanningshop, California


Business failure — recommended articles
Continuous innovation — SWOT analysis — Life cycle of organization — Crisis in the enterprise — Strategic planning tools — Innovative leadership — Cash is king — Strategic driver — Mobility barriers

References

Author: Agnieszka Florczak

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