Why Businesses fail (Cambridge (CIE) O Level Business Studies)

Revision Note

Causes of Business Failure

Business failure is a risk to both new and established businesses
- In 2021, an average of 8% of businesses in EU countries failed
  - The highest failure rate was in Estonia, where almost one in four businesses failed
  - The lowest failure rate was in Greece, where just over 2% of businesses failed
New businesses are often more at risk of failure than well-established businesses
- This is often due to lack of management skills, limited experience or cashflow problems during the initial start-up phase
- The volume and variety of tasks required of new business owners can be overwhelming
- Market research is unlikely to be detailed, as small business owners may lack the skills to understand findings and make effective decisions

The Main Reasons why Some Businesses Fail

Financial Factors	Poor Management
A business may be unable to generate enough revenue to sustain its operations Costs may rise sharply and eliminate profit margins Cash shortages mean that creditors cannot be paid what they are owed Limited access to finance, such as loans/trade credit can be particularly problematic for start-ups	Lack of experience can lead to poor decisions related to product range, pricing or promotional activity Making decisions based on hunches rather than market research Ineffective coordination and planning of business operations, such as stock purchasing or staffing, can increase costs
External Factors	Overtrading
Ineffective or delayed response to new technology, powerful new competitors and major economic change Changes in laws or taxation can increase pressure on businesses to make difficult choices	This occurs when a business expands too quickly Poor coordination and planning of growth can lead to diseconomies of scale, which increases costs

Examiner Tips and Tricks

It is worth remembering that making losses does NOT always mean business failure. In many cases, businesses make little (if any) profit in the early stages of operation. This is because they invest in order to increase sales, which should increase profitability in the long run

Last updated: 12 June 2024

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