Business failure

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Joe's was one of the businesses to fail in 2009.
Advertisement for "Quitting Business" sale in Los Angeles, California, newspaper, 1909


Business failure refers to a company ceasing operations following its inability to make a profit or to bring in enough revenue to cover its expenses. A profitable business can fail if it does not generate adequate cash flow to meet expenses.[1]

Reasons[edit]

Businesses can fail as a result of wars, recessions, high taxation, high interest rates, excessive regulations, poor management decisions, insufficient marketing, inability to compete with other similar businesses, or a lack of interest from the public in the business's offerings. Some businesses may choose to shut down prior to an expected failure. Others may continue to operate until they are forced out by a court order.

The Small Business Administration, in an article on small business failure,[2] lists additional reasons for failure from Michael Ames book on "Small Business Management":

  • lack of experience
  • insufficient capital
  • poor inventory management
  • over-investment in fixed assets
  • poor credit arrangement management
  • unexpected growth[3]

A study published in 2014 by the Turnaround Management Society reveals that most crises are caused by the mistakes of top management. The most prominent causes of a crisis are that the management continued with a strategy that was no longer working for the company (54.6%), and that they lost touch with the market and their customers and did want to adapt to changes occurring around them (51.6%). Having a clear strategy that is communicated well to all operational areas, one that uses and builds USPs, is desirable for every company but is often not the case. Incorrect strategic decisions (39.4%) are often made because of the lack of a clear strategy, and they can have a significant impact on a company’s financial position in the market. [4]

Other opinions about the most important reason that businesses fail:

  • Peter Drucker claimed the most important reason that businesses fail is because management didn't ask "what is our business?" in a "clear and sharp form."[5]
  • Eric T. Wagner, who has 30 years experience as a serial entrepreneur, says that entrepreneurs fail when developing new products because they "retreat to a cave" instead of thoroughly understanding their customers needs. A survey of more than 1000 Australian SME business owners found that business failure was most likely because of an inability to manage costs.[6]
  • Dr. Christoph Lymbersky analysed internal causes over a timeline of 38 years which shows that the lack of financial control is becoming less and less relevant as a crisis factor. In 1984 inadequate financial control still contributed to 75 percent of all corporate crises. In his 2014 survey, only 36 percent or restructuring consultants reported inadequate financial control to be a cause of decline. [7]
  • According to a study by Industry Canada, "the main reason for (business) failure is inexperienced management. Managers of bankrupt firms do not have the experience, knowledge, or vision to run their businesses".[8]

After closing[edit]

After, a business may be dissolved and have its assets redistributed after filing articles of dissolution. A business that operates multiple locations may continue to operate, but close some of its locations that are under-performing, or in the case of a manufacturer, cease production of some of its products that are not selling well. Some failing companies are purchased by a new owner who may be able to run the company better, and some are merged with another company that will then take over its operations. Some businesses save themselves through bankruptcy or bankruptcy protection, thereby allowing themselves to restructure.

Three of the most famous cases of business failure[edit]

Pan Am Airlines Founded in 1927, Pan Am was American’s aviation cultural trademark for decades, leading the industry to change its direction and start providing international flights and luxury travel. It was also the first airline which started using jumbo jets and the first one that introduced the concept of stewardess to be used for PR purposes. This American icon that once transported the Beatles themselves became a target for terrorist acts. An unfortunate chain of events and the rising global competition led to its collapse in 1991.

Ford Edsel In 1957, Ford invested no more than $400 million into in a new model named Edsel unfortunately named after one of Henry Ford’s sons. While no one root cause for the failure of the Edsel was ever identified, it was generally acknowledged that the design and poor build quality of the car and the poor marketing were all contributors. In 2015 dollars, the Edsel cost the Ford Motor Coy the equivalent of $3.2 billion.

New Coke in the 80’s In the early 80’s, Coke had been losing ground to Pepsi, so the company changed the formula of original coke to taste more like Pepsi. Despite the positive testing results made before its launch in 1985, consumer backlash was overwhelmingly negative and, at times, hostile. Moreover, after a three months, Coke abandoned it and reverted to its old formula, re-branding it Coca-Cola Classic.

Avoiding business failure[edit]

Managing cash flow[edit]

Extended periods of negative cash flow is one of the greatest reasons for business failure. A balance must be maintained between the money coming in through sales and expenses. A relatively new startup must learn how to manage its capital so that services can be provided and the expenses minimized as much as possible.[9]

Creating robust business plan[edit]

A marketing plan is something every business should create. Quality marketing is the key for any business to succeed. An effective marketing plan brings customers and they, in turn, bring in income. A marketing plan has to be researched thoroughly and must contain relevant marketing strategies for every sector of the business. The business plan is also decisive since it determines the way in which a company is going to achieve its revenues.

Avoiding high debt[edit]

Every business should be aware of any credit cards or loans because these might turn out to be extremely dangerous. Even though after acquiring the credit, things may seem to go smooth, the downside of such an action comes when repaying it. The danger that a company might lose its flexibility to keep up with the competitors appears in the moment when all of its efforts are focused on trying to repay the debt and not on trying to gain new customers or recruit new employees[10]

Adjusting expectations[edit]

Business owners can often be blinded by their optimism. Trying to put in practice ideas they think would have a positive effect on customers can lead to a series of events that start with overestimating potential revenues and underestimating future costs. Basing their future on inaccurate data, company executives could make bad decisions that would later affect the financial well-being of the business.

Narrowing perspectives[edit]

A business should always concentrate on what it does best. Often this will mean concentrating on a particular niche area of business but doing it better than any of your competitors. Having a tradition of concentrated focus and niche marketing usually leads to a successful business.

See also[edit]

References[edit]

  1. ^ Cash Flow: The 10 Rules of Cash Flow 101
  2. ^ What are the major reasons for small business failure?, U.S. Small Business Administration, retrieved 2013-11-29 
  3. ^ Ames, Michael (1983), Small Business Management, West Group 
  4. ^ Why do Companies fail? 2014 Survey Results, Turnaround Management Society, 14 February 2014 
  5. ^ Krames, Jeffrey (2008), Inside Drucker's Brain, Portfolio - Penguin Books, p. 163, ISBN 978-1-59184-222-4 
  6. ^ Top reasons for small business failure: Study, Smart Company, 12 April 2013 
  7. ^ Why do Companies fail? 2014 Survey Results, Turnaround Management Society, 14 February 2014 
  8. ^ Baldwin, John; Gray, Tara; Johnson, Joanne; Proctor, Jody; Rafiquzzaman, Mohammed; Sabourin, David (1997), Failing Concerns: Business Bankruptcy in Canada (PDF), Minister responsible for Statistics Canada, ISBN 0-660-171201 
  9. ^ Cash Flow Management & Debt Equity, B2S, 18 January 2015 
  10. ^ Preventing high debt, Small Business Chron, 19 March 2014 

External links[edit]