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2.3.3 Business failure

A) Internal and external causes of business failure

Internal causes of business failure:

  • Inefficiency – If the business is inefficient then it is likely to result in a reduction in the profit that the business makes. As a result of this, there is likely to be a lack of working capital which may result in the business being able to pay current liabilities and therefore causing the business to fail.
  • Poor market research – Poor market research can cause the business to enter a market where there is a lack of demand for their goods/services. This will result in a lack of revenue which may mean that the business is not profitable and therefore will fail.
  • Failure to innovate – This can result in falling revenues which may eventually result in a shortage of working capital thus causing the business to fail.
  • Poor cash flow management – This may result in businesses experiencing a lack of cash and therefore resulting in them being unable to pay their current liabilities. The risk of this occurring can be reduced through cash flow forecasts to identify and solve months in which there may be shortages of cash.
  • Lack of capital leading to excessive borrowing – If the business is unable to pay its current liabilities then it may need to loan money. This may lead to excessive borrowing resulting in the business failing in the long term.


External causes of business failure:

  • Strong pound – A strong pound will result in an increase in the price of domestic exports. This will reduce the competitiveness of domestic goods/services being sold abroad. As a result of this, exporting businesses will see a decrease in the demand for their goods/services. This will result in a reduction in revenue which could cause the business fail.
  • Competition – The business may fail due to actions from competitors. For example, if one of the main competitors decided to adopt a predatory pricing strategy then it could force the business out of the market.
  • Government policies – Policies set by the government such as a big increase in the corporation tax could increase businesses costs of production massively. This may result in the most inefficient businesses being forced out of the market.
  • Recession – A change in economic conditions such as a long term fall in economic growth may result in a significant reduction in demand. As a result of this, some businesses may struggle to remain profitable and therefore close.
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