Businesses just starting out have a generally low rate of success, 50% of businesses fail within the first two years. Some of the common causes of business failure are avoidable, however there are some examples that businesses may not predict.

Could Leadership Cause Business Failure?

Leadership in a business is vital to its survival, but failure to identify where they need to straighten up and fly right again could mean that a business is left behind, unable to correct it’s course.

• Loss of Control, Just short of divorce of ownership, an owner unable to make effective and authoritative decisions could mean that a business could start to lack innovation or a competitiveness that every business needs to get an advantage over competition. At the same time, an owner making too little decisions could also mean a business effectively has no leader, which in small business could be the difference between growth and decline.
• Overtrading could see a business go into liquidation, it is important that a business can fulfil its promise and deliver too customers and HMRC, if a business does not identify when it needs to have some liquid assets or a financial cushion, it could loose out on future repeat purchases. Bad leadership could be the root cause of overtrading, however poor management and/or communication could also make overtrading the determinate factor. Machinery breaking may also mean that overtrading orders that they can no longer fulfil could cause massive cash flow problems for a business
• Ineffective Expenditure could mean that a business could go quick. Inability to manage finance and good investments could see even the largest business fail. Even if a business does not invest in merit-less research and development, a lack of innovation or diversification in their products could also see them fail as a result. 
  • Poor cash flow could lead to insolvency.
  • No profit made
  • Margins are too high, not enough return.
  • No Inflows, Product is not developed effectively.
  • Pressure groups prevent business from making enough money or attract too much of a negative stigma.
  • Interest rates mean business cannot afford premises.
  • Business unable to move product as price is too high because ingredients are too expensive.

Business can also fail if they do not have enough profit,companies that can’t expand due to financial and logistical restraint, greed and overheads being too high could mean that a business is unable to continue trading.

Key Terms

• Business Administration – A management firm (usually accountants) come into a business in order to improve spending and save a business from collapse.
• Liquidation – Selling assets to cover costs. Usually as a last resort to pay debtors.

Common Business Failure

 

Financial

• Minimum wage has increased (living wage)
• Economy is bad (or not favourable)
• Inadiquate Finance
• Majour Bad Debt
• Inadiquate shareholder capital
• Employees are not getting paid, so stop working
• Greed or Theft
• Dominant sales from a now dead source

Non-Financial

• Legal and Social Change
• Consumer Protection Laws
• Poor Management
• No Interest in Business
• Poor Idea
• Poor Execution
• Poor Tourism/Footfall