Reasons for Business Failure

Give an account of various reasons that cause a business to fail.

A business is said to have failed when it is not able to make any profits or generate adequate revenue to cover its expenses and subsequently stopping all of its operations. To meet its day to day expenses, a business has to generate enough cash flow. If a profitable business is not able to do this, it is said to have failed.
The following are the various reasons that could cause a business to fail.
- Adequate cashflow Deficit: Cashflow is defined as a business’s capacity to maintain enough funds to meet its day-to-day expenses related to the business activities. When a business is not able to estimate the incoming and outgoing cashflow, it is prone to failure. This is especially true in case of small businesses. Due to this reason it is very critical for the entrepreneurs to get enough accounting knowledge so that they can make cashflow projections. This will help them to estimate how much they can spend each month.
- Bad/Poor Business Planning: The most common cause for around 90% of business failures is poor business management competencies and planning. A well prepared business plan incorporates
- Business mission
- Cost Structure
- External influences
- Market
- Strengths and Weaknesses
Other details like
- Marketing Plan
- Operating Plan
can also be included.
When these details are poor, it leads to business failure.
- Competition Ignorance: When the business fails to keep a watch on competitors and positioning of the products, the customers, who are always looking for a better/best offers will move out to the competing business which is offering a better product or service or lower price. This will make the customer a winner at the cost of business losing. This will lead to failure of business.
- Decreased customer base: Businesses tend to lose customers under competition. Small businesses are better to focus on a customer strategy that suits well for them. They should also be looking for alter strategies instead of completely sticking to one. It is essential for the business to have a difersifying customer base. The business should always be ready to adapt new ideas and trends. Failure to do so will lead to failure.
- Entrepreneurial skill deficit/lack: Inadequate entrepreneurial skills, especially during the start up phase, are critical for making a business successful. During the later phases having administrative and management skills pays off. The success of a small business depends on
- Owner behaviour
- Owner characteristics
- Environmental influences
Entrepreneurs being high risk takers and have a greater need for achievement and social awareness, their personal and personality characteristics might lead to business failure.
- Faulty/Poor System of Control: A business has no control over the external environment but it has easy access and control to internal environment. Failure to exercise control on the internal environment will lead to business failure. The should be controlling factors for
- Quality of production
- Quantity of production
- Financial control to ensure financial performance
The control system should be capable of establishing standards, measure performance, compare performance against standards and take corrective measures to eliminate deviation from the standards. Failure to do so will cause the business to fail.
- Growth Spurt: Uncontrollable growth, if not dealt with properly, will cause the business to fail. There should be professional management team, flexibility in the business, appropriate systems and controls in place for the business to succeed. The business can achieve this through proper planning. When this is not considered, it might lead to failure.
- Having incompetent Management:When the management is incompetent or inexperienced it will not be possible to manage and effectively implement and monitor the strategic and operational plan of the business. Though a business have an excellent strategic plan, its effectiveness depends on the management’s competence to implement it. Management incompetency is also the root cause of around 90 percent of business failures.
- Inappropriate Location: Chosing an unsuitable location will cause business failure. This factor is not applicable for all the businessses but for some business being at the right location is very important. Failure to establish the business at the correct location will cause the business to fail.


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