1.3.4 Why some Businesses Fail
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✅ Causes of business failure, e.g. lack of management skills, changes in the business environment, liquidity problems ✅ Why new businesses are at a greater risk of failing |
1.3.4 Why some (new or established) Businesses Fail
The business world is tough, and for all the business success we hear about, there are also many failures. The failure rate (where businesses go bankrupt or stop trading) is about 50% within five years in the USA. So there is only a 1 in 2 chance of any business making it to their 5th birthday.
Why does this happen?
Lack of management skills. Business managers have to be experts in finance, marketing, operations and all aspects of the business. It is very difficult to master every part of business and mistakes or bad choices can lead to failure.
Startups are particularly vulnerable, as they are just starting out and lack the experience or expertise of competitors, and will inevitably make mistakes.
Changes in the business environment. Changes in the business environment can affect the whole economy like a recession, where the economy gets smaller. Changes in the business environment may also just affect a small section of the economy. For example, online shopping has made it very difficult for ordinary “bricks and mortar” shops to compete. Many high street shops have closed down as they can’t compete on price and convenience with Amazon and Alibaba.
Lack of finance/liquidity. Startups often underestimate how much money they will need to survive, and it can be a real challenge to predict sales accurately. If revenue is lower than costs the business will ultimately fail. More established companies can base their sales forecasts on previous results.
All companies will fail if they don’t have enough money coming into the business to be able to pay their short term debts.
| Link Unit 5.2 Cash Flow |
