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Why do businesses fail?

Updated: Jul 2

Many entrepreneurs fail before they can succeed. As such a business may fail if they have;

  1. Poor entrepreneurial skills

  2. Lack of planning and research

  3. Failure to obtain financing

  4. Wrong location for the business

As such, the causes of business failing is due to

  1. Lack of management skills

  2. Poor liquidity

  3. 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.


  1. Cash-flow

  2. Profit

  3. Business Cycle

  4. Insolvency

  5. Market Research

  6. Liquidity


  1. Identify two reasons why a business might fail. (2 marks) Oct/Nov 2018/11

  2. Identify and explain two ways to reduce risk of starting a business (6 marks) Oct/Nov 2018/13

  3. Identify four reasons why a new business might be at greater risk of failure than an established business. (4 marks) May/June 2022/12

  4. 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

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