Business failure

Question 1

what is business failure?

Answer 1

can be defined as the inability to keep the business going, either because of inability to keep up with the bills/liabilities

Question 2

5 reasons businesses may fail

Answer 2

1. not in touch with customers
2. no real differentiation (lacking a unique value proposition)
3. failure to communicate your unique positioning in a concise and compelling way = right idea wrong target market
4. leadership breakdown to the top = a dysfunctional leader who is perhaps too aggressive or too weak to lead
5. inability to nail a profitable business model with sufficient revenue streams

Question 3

what are the internal causes of business failure?

Answer 3

1. a marketing failure - business is losing market share and struggling to develop new products, it will eventually fail
2. poor management of cash flow- often when business expanding too rapidly
3. system failure
4. lack of innovation

Question 4

what are the external causes of business failure?

Answer 4

1. a change in technology that gives a rival a competitive advantage that is too great to be matched
2. arrival of a competitor who is effective at acquiring and keeping customers that others lets go of
3. economic change
4. the behaviour of banks

Question 5

What are the financial causes of business failure?

Answer 5

1. liquidity crisis = run out of cash
2. insolvency - liabilities outweigh assets
   - could happen due to a big investment going wrong
3. diseconomies of scale

Question 6

How do businesses run out of cash?

Answer 6

• business may have been running below break-even for some period of time
• the lossmaking drains the business of its cash
• cash outflows exceed cash inflows
• cash flow crisis
• overtrading
• rise in demand encourages a business to pursue rapid sales growth, the strain of cash flow can prove too great, causing the company to collapse

Question 7

what are the non-financial causes of business failure?

Answer 7

• people management or resource management
• lack of innovation
• increased competition
• external shocks

- unhappy staff may have stopped giving customers an enjoyable experience so sales steadily slide towards a rival

Question 8

Raise fresh capital 
            ↓
revamp products and services 
            ↓
keep suppliers on the side 
             ↓
invest in a serious promo campaign 
             ↓ 
cash should start to flow again

Answer 8

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