Theme 2 Topic 14
Business Failure
Causes of Business Failure
Internal Factors
These arise from problems inside the business:
Poor cash flow management – 70% of business failures are due to this. Even firms which are
profitable find it impossible to continue trading as they are unable to pay their debts
Lack of effective market research – small businesses often lack the resources to undertake sufficient
research and consequently have limited information about their target market and competitors.
Larger firms may neglect market research and don’t spot changes in the market or what their
competitors are doing
Lack of skills needed to run a business – small businesses often lack the resources needed to employ
skilled staff with specialist business knowledge, so they make bad decisions
Difficulties establishing a customer base – new businesses often find it hard to attract sufficient
customers – could be due to having insufficient funds to spend in marketing
External Factors
These arise from problems outside the business:
The actions of bigger competitors – more established competitors may be able to charge lower prices
or launch more effective marketing campaigns
Changes in economy – especially if it goes into recession, consumers will have less money to spend.
Businesses suffer from lack of demand and may have to reduce prices, leading to lower profit margins
Rising cost of raw materials, rent and energy – these will increase costs. If a business increases its
prices to cover these costs, it may lose customers
Government regulations – these will add to business costs, as well as restricting business activity.
There is also the ‘opportunity’ cost resulting from completing all the paperwork required by the
regulations
Business Failure
Causes of Business Failure
Internal Factors
These arise from problems inside the business:
Poor cash flow management – 70% of business failures are due to this. Even firms which are
profitable find it impossible to continue trading as they are unable to pay their debts
Lack of effective market research – small businesses often lack the resources to undertake sufficient
research and consequently have limited information about their target market and competitors.
Larger firms may neglect market research and don’t spot changes in the market or what their
competitors are doing
Lack of skills needed to run a business – small businesses often lack the resources needed to employ
skilled staff with specialist business knowledge, so they make bad decisions
Difficulties establishing a customer base – new businesses often find it hard to attract sufficient
customers – could be due to having insufficient funds to spend in marketing
External Factors
These arise from problems outside the business:
The actions of bigger competitors – more established competitors may be able to charge lower prices
or launch more effective marketing campaigns
Changes in economy – especially if it goes into recession, consumers will have less money to spend.
Businesses suffer from lack of demand and may have to reduce prices, leading to lower profit margins
Rising cost of raw materials, rent and energy – these will increase costs. If a business increases its
prices to cover these costs, it may lose customers
Government regulations – these will add to business costs, as well as restricting business activity.
There is also the ‘opportunity’ cost resulting from completing all the paperwork required by the
regulations
