UNIT 2.4

Why do businesses fail?

In this section you will learn:

Why some businesses “Go under”?What can go wrong within the business?What can affect the business from

outside?How can firms use information to avoid

failure?What does a business do if the cash runs

out?

In this section you will learn:

What the Business Cycle isWhy businesses need to respond to

change?How managing resources can contribute

to success or failure?How a business faces up to failure?

Why do businesses fail?

In recent years more and more people have started up their own businesses –

Virgin – airlines, trains records etc – Richard BransonThe Body Shop – Anita RoddickKwik Fit – Tom Farmer

Unfortunately not all business are a success – about 80% fail within a short time.

Reasons why businesses fail

Fierce competitionEconomic recessionCash flow problemsBusiness not moving with the timesPoor resource managementExternal factors – war, floods, political

factors

Reasons why businesses fail

COMPETITION – COMPETITORS HAVE:

Better productsIdentified the market more clearlySet their prices extremely low to eliminate

competition – Destroyer pricing – prices rise once competitors have been destroyed.

Lower prices – importing from abroad

Reasons why businesses fail

RECESSION

Financially economy slows downLess produced, less spent, less boughtObtaining loans is differentUnemployment usually increases in

recession

Reasons why businesses fail

CASH FLOW PROBLEMS

A business should prepare cash budgets etc

“If you fail to plan, you plan to fail”

Businesses should prepare for future downturns by building up reserves

Reasons why businesses fail

NOT MOVING WITH THE TIMES

Product is obsoleteProduction outdated – need for

automationUnfashionableMarketing/ advertising ineffectiveProduct end of life cycle

Reasons why businesses fail

POOR RESOURCE MANAGEMENT

Businesses not managing their resources

properlyCar parks not properly maintainedShabby premises, fault doors, poor

heatingBadly maintained equipment

Reasons why businesses fail

POOR RESOURCE MANAGEMENT

Lack of efficient security leading to pilfering/stealing

Failure to keep efficient records resulting is asset theft

Demotivated staff –High prices resulting in drop in market

share

Reasons why businesses fail

EXTERNAL FACTORS – PEST factors

Political – new laws Economic – increasing interest ratesSocio-cultural – ban on smoking in publicTechnological – important to keep up with

technological advances.

THE BUSINESS CYCLE

The Business Cycle shows the pattern

of UPS (Booms) and DOWNS

(slumps) over a period of time in the

economy. It shows the level of

economic activity.

GOING DOWN

RECESSIONGOING UP

SLUMP

BOOM

THEBUSINESS

CYCLE

How the level of economic activity can affect a business?

Businesses are affected by each stage of

the Business Cycle.

Different types of businesses can be

affected in different ways.

How the level of economic activity can affect a business?

On the downturn:

Unemployment increasesSome people will reduce their spendingSome people may try and save “for a rainy

day”This will mean that fewer goods and

services are purchased so organisations will produce less and output will fall.

THE ECONOMY IS IN RECESSION

Businesses tend to do badly in periods of recession

How the level of economic activity can affect a business?

As things start to recover:

People will start to buy againFirms will produce moreThe economy starts to grow

How the level of economic activity can affect a business?

As orders increase:

Firms will employ more workers to produce goods and services

Employment improves and spending power increases

As things start to look good the economy enters the BOOM period.

How the level of economic activity can affect a business?

But when workers see the firm doing well

They will demand higher wages resulting in higher costs to the business

Businesses may find they cannot always deliver what people want

Prices start to rise due to increased costs and inflation may then increase

How the level of economic activity can affect a business?

But when workers see the firm doing well

Products become less competitiveOther countries can produce more cheaplyDemand for our country’s products falls

The economy is back on the road to recession