2.3.3 Business failure (Internal factors) Flashcards
(16 cards)
Business failure
When a business no longer can stay open because it isn’t making enough money to cover it’s costs.
3 MAIN KEY FACTORS THAT CAUSES BUSINESS FAILURE
Internal financial factors
Internal non - financial factors
External factors
Internal factors
Factors that a business is able to control that cause the business to collapse
4 internal financial factors
-Bad management of working capital
- cash flow problems
- Poor efficiency
- Bad decisions about how to finance the business
Working capital
the money available to pay a business day2day expenses e.g paying staff & suppliers
How can bad management of working capital lead to business failure?
Can result in a business not hvaing enough cash to pay its day2day running of the business e.g paying staff & suppliers
What can a business do to ensure it has good management of working capital
Needs to make sure it has accurate cash flow forecasts
How can Cash flow problems lead to business failure?
Many business fail because they run out of cash
Reasons why cash flow problems occur?
blue book and red book examples for clearer explanation
- Allowing too much trade credit ( allowing customers to pay at a later date
-overborrowing - Overtrading
- unforeseen costs e.g breakdowns, bad debts not being accounted for
How can poor efficiency cause business failure
a business with poor efficiency has costs that aren’t as low as they can be
This may mean that a business may have to charge higher prices than their competitors in order to make a profit/cover costs
- decreased demand for your product resulting is less sales revenue
How can bad decisions about how a business is financed cause business failure
Businesses can finance their business wrong which can result in a strain of a businesses cash position
e.g over-borrowing - as more loans are taken out interest costs rise meaning you have to pay way more back.In the long term it can be too expensive
4 internal non financial factors
-Poor market research
- Failure to innovate
-Poor marketing - lack of skills
How can poor market research lead to business failure
Inadequate market research may mean that’s businesses are not aware of the customers needs and taste and preferences
- Therefore you may release a product where there is no demand for
- as a result means lower revenue which means no money to pay for expenses
How can a failure to innovate cause a business failure
If a business fails to keep up with consumer preferences by lack of innovative new products then it’s likely to fail
How can poor marketing cause a business to fail
Marketing is used to drive demands
If marketing isn’t done correctly (e.g right time, strongly enough) then sales revenue may not be enough to cover business costs
How can a lack of skills lead to business failure
skills e.g strong leadership & poor financial management may lead to business failure
