Why do businesses fail?
Updated: Jul 2
Many entrepreneurs fail before they can succeed. As such a business may fail if they have;
Poor entrepreneurial skills
Lack of planning and research
Failure to obtain financing
Wrong location for the business
As such, the causes of business failing is due to
Lack of management skills
Poor liquidity
Changing business environment
Entrepreneurial Skills
Poor entrepreneurial skills are likely the main reason most businesses fail as many successful entrepreneurs possess certain skills and character that make them successful.
Planning and research
Without proper planning and research such as a market research, the entrepreneur will not be able to develop a proper business plan with cash-flow forecast, that could ensure that the business could start and operate with adequate liquidity.
Limited financing option
Most businesses start small and may not be able to raise financing until they are able to show profitability. This may take time and some businesses may run out of cash before it could become profitable to get a loan.
Location of business
Businesses that locate in an area not accessible by their target customers will not be able to sell its product and services. Some premises may also require high rental that will increase expenditure and reduce profit.
Business environment
Business environment changes all the time. During a recession, many businesses rely on retained profits to sustain their businesses as sales and demand decline. During the COVID-19 pandemic, many small businesses became insolvent, as they could not generate enough revenue due to lockdowns, to sustain cash-flow to pay overhead expenditures, such as wages and rent.
RELATED CONCEPT
Cash-flow
Profit
Business Cycle
Insolvency
Market Research
Liquidity
PAST YEAR QUESTIONS
Identify two reasons why a business might fail. (2 marks) Oct/Nov 2018/11
Identify and explain two ways to reduce risk of starting a business (6 marks) Oct/Nov 2018/13
Identify four reasons why a new business might be at greater risk of failure than an established business. (4 marks) May/June 2022/12
Do you think making a profit is more important for a growing business than managing cash flow? Justify your answer. (6 marks) May/June 2021/13