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O LevelBusinessCambridge (CIE)Business StudiesRevision Notes1. Understanding Business Activity1.3 Enterprise & Business GrowthWhy Businesses fail

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

Revision Note

Danielle Maguire

Written by: Danielle Maguire

Reviewed by: Steve Vorster

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

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    Author
    Reviewer
    Danielle Maguire

    Author: Danielle Maguire

    Expertise: Business Content Creator

    Danielle is an experienced Business and Economics teacher who has taught GCSE, A-Level, BTEC and IB for 15 years. Danielle's career has taken her from across various parts of the UK including Liverpool and Yorkshire, along with teaching at a renowned international school in Dubai for 3 years. Danielle loves to engage students with real life examples and creative resources which allow students to put topics in a context they understand.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.