Why do businesses fail

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Businesses fail for a number of
reasons ...
Cash Flow Problems
• Cash Flow causes most problems
• Many businesses do not plan ahead
  properly - they do not draw up a Cash
• Even those that do can be caught out ...
• They may have been too optimistic with
  their figures
• Perhaps a big customer takes a long time
  to pay or even goes bust owing them money
• Perhaps they suffer storm damage
• Or there is something quite unforeseen like
  a petrol blockade or foot-and-mouth which
  stops people moving about and affects

• The result is that there is not enough cash
  coming in to pay the bills
• The bank may allow an overdraft for a
  limited time but if things don’t improve the
  business will go down the
   Read the article on Worksheet
Why Businesses Fail – worksheet 1
and answer the questions.
Competition is too fierce
• They have a better product
• They use destroyer pricing
   - making prices so low
   other businesses can’t
 • They have identified their market better
 • They have joined together (illegally) to
    push you out
Business generally is bad
The economy is in recession which means
• less is produced
• less is earned
• less is spent
• less is bought
• more people are unemployed and have no
  money to buy things
The business has not kept up-to-
• The product is obsolete
• The product is no longer fashionable
• Method of production is old-fashioned and
• Marketing is not effective
Poor management
• Unattractive, shabby
  premises - puts
  customers off
• Stock not available -
  customers go elsewhere
• Old, dangerous
  equipment - leading
  to staff injury and
  time off
• De-motivated staff -
  leading to poor
  customer service and
  high staff turnover
• Poor record keeping and supervision of
  staff leading to theft and reduced profit
    What kind of challenges
     do businesses face?

Businesses may face many challenges.

Some of these come from within the
business (INTERNAL) and some come from
outside the business (EXTERNAL)
Internal Challenges
Businesses face pressures from within, eg
• Shortage of Finance
• Staff Problems
• Faulty equipment
Shortage of Finance
If there is a lack of money in the business, the
business may find it more difficult to:
• expand
• buy new equipment
• pay bills
Staff Problems
Problems with staff can occur if they
feel they are not working in a good
environment including the following:
• poor industrial relations resulting in employees
going on strike etc
• poor quality of goods/services due to
unmotivated staff
• staff may leave for an organisation offering
better wages, promotion prospects. This may
result in a fall in production
Faulty Equipment
Problems with equipment may result in products:
• which are of poor quality
• not produced on time
• not up to the standard of competitor’s products
External Pressures
Businesses can also face constraints from
the outside, eg
• Political challenges
• Social & environmental challenges
• Technological challenges
• Competitive challenges
Businesses need to be aware of Government
legislation. There is legislation to protect:
• the consumer ~ Trade Descriptions Act 1968, Food
Safety Act 1990
• the employee ~ Minimum Wage Act, Health & Safety at
Work Act, Working Time regulations, Sex Discrimination
Act, Race Relations Act
• the environment ~ laws are passed to protect the
environment from any harmful actions of businesses.
Fines can be placed on businesses if they abuse
pollution laws
            Complying with government laws will increase
            business costs in both time and money.
Access the Internet. Search for
the pieces of legislation listed
previously. Write a brief note
describing each law.
These challenges are based upon changing
needs & wants of the consumer.
• Consumers are increasingly aware of environmental
issues, and will often only buy goods from firms that can
show they have not damaged the environment.
• There are more women in work, people living longer,
more single parent families, and the average family now
has less than 2 children. These factors mean that
customers have changed and the firms have to provide
goods/services to match their demands. Eg, there has
been an increase in companies providing holidays for
the over sixties.
       These challenges are based upon changing
       Technology is changing rapidly, therefore businesses
       find themselves investing in new technology regularly
       so as not to be left behind by their competitors.
       New technology requires money to be spent on the
       equipment and training for staff.

then                                                           now
The aim of a business to increase its profit and
expand may be affected by competition from
other firms. Types of competition faced by firms
• lower prices
• better quality products
• new ideas
• lower wage rates/raw materials abroad can result in
cheaper imports into Britain

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