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The Common Causes Of Business Failure Business Essay

Paper Type: Free Essay Subject: Commerce
Wordcount: 5371 words Published: 1st Jan 2015

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Lack of Industry Experience and Knowledge, Insufficient Start-up Money, Failure to Understand Market and Customers, Poor Employee Management Skills, Wrong Location, Improper Pricing of Product or Service, Failure to Understand and React to Competition, Incorrect Cash-Flow Estimates (Poor Budgeting), Insufficient Time Devoted to Business, Mismanagement of Assets,(Cash ,Inventory, Receivables, Fixed Assets)

Prepare Sales Tax & Make Quarterly Payments, Estimate Income Tax, Make Payments, Analyze Doubtful Accounts Receivables, Review Detailed Inventory Schedule, Analyze Prepaid Expenses, Review Schedule of Property and Equipment, Review Accounts Payable/Accrued Expenses, Review Schedule of Insurance Policies. Reconcile to P&L, analyze Inventory Write-downs, Analyze Other Assets and Other Liabilities, Analyze Current/Long-Term Debt, Prepare IRS Forms W-2 (employee) and Forms 1099 (consultant), Close Financial Books for the Year, Draft Financial Reports (if needed), Draft Tax Returns

If they have no ideas of these items there was maximum chance of business failure and need to minimize the business and go ahead to success.

Fredland and Morris (1976) says when a owner start a business he/she/company accept the three kinds of risk. which resolve the success to the business. firstly. risk related with the economy in which business is located. it referred to economy based risk. Secondly, risk related with the industry in which that business is operating. It referred to industry based. Thirdly, risk related with the business itself which is unique. I t refereed to firm based risk.

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According to (Dun and Bardstreet 1997), said that most of the business are failure because they cannot survey about their business and their employees. Only 20 employees have 37% chance to surveying four years. 9% chance of surveying 10 years and these failed business 10%of them closed involuntarily due to bankruptcy and 90% closed because the business was not successful. Other thing is owner didn’t pay how much the employee wants or desired as for their effort.

In US over 43000 business failed on 1997 that’s total liabilities nearly $20 billion.90% business failure in the US are caused by a lack of general business management skills and planning. According to Dun & Bradstreet statistics7, 88.7% of all business failures are due to management mistakes. The following list summarize the 12 leading management mistakes that lead to business failures.

1) Going into business for the wrong reasons

2) Advice from family an friends

3) Being in the wrong place that the wrong time

4) Entrepreneur gets worn-out and/or underestimated the time requirements

5) Family pressure on time and money commitments

6) Pride

7) Lack of market awareness

8) The entrepreneur falls in love with the product/business

9) Lack of financial responsibility and awareness

10) Lack of a clear focus

11) Too much money

12) Optimistic/Realistic/Pessimistic

It should be understood that no magic solutions will guarantee a business success. However, the following items should assist in the improvement of chances for success.

1) Development of a business plan

2) Obtaining accurate financial information about the business in a timely manner

3) Profile of target

4) Profile of competition

5) Go into business for the right reasons

6) Don’t borrow family money and don’t ask the family for advice

7) Network with other business owners in similar industries

8) Don’t forget, someone will always have a lower price than you

9) Realize that consumer tastes and preference change

10) Become better informed of the resources that are available

1.2.2 some causes of business failure in the market

1. Lack of clear links between the objectives and the organisation’s key strategic priorities, including agreed measures of success.

2. Lack of clear senior management and other level.

3. Lack of effective engagement with stakeholders.

4. Lack of skills and established approach to project management and risk management.

5. Too little attention to breaking development and implementation into manageable steps.

6. Evaluation of proposals driven by initial price rather than long-term value for money (especially securing delivery of business benefits).

7. Lack of understanding and contact with the supply industry at senior levels in the organisation.

8. Lack of effective organization team integration between clients, the supplier team and the supply chain.

1.2.3 Small Business Success story

One of the success busine.ss story of Oscar Neal Asbury who is the founder and president of Greenfield World Trade. He involved in exporting of high quality US product since 1979.he gives the service for the food and equipment over 130 countries to both retail and commercial market.

Now a days Asbury is the US economy stragglers he expanding his products. He is a success business man at getting loan during the national credit crunch and witness to the financial strength of his company as well as the strategic importance of being an exporter to over 130 countries. He won the prestigious award 2008 small business week National Exporter Year award and E-Star Export and the Export Achievement award from the US Department of commerce.

In 1981 he went to Asia for represented several US manufactures throughout the region and In 1987 he found Asbury worldwide which became the largest American Export management company in its segment with 12 distribution facilities around the world. He starts FAB Asia, Inc. In the Philippines which was the exclusive Asian fabricators of commercial kitchens for McDonalds as well as other well known American restaurants and chains. In 1999 Mr. Asbury established his current company, Greenfield World trade ,.Inc. He published over 50articals on global trade issues, a column for to The Point News and International Trade Blog for asburysworld.com .

Mr. Asbury is also an advocate, leader in this field and also the US secretary of commerce, he serves as the chairman of the South Florida district Export Council and is a founding faculty member of Export University. He is also the member of the international policy committee at the US chamber of commerce in Washington DC.

This is the successful business story of Asbury in the small business organization who gives his effort for the organization. At that time he used various types of ideas and business strategy with their business competitors.

when the business start it need to faced many kinds of internal and external problems. For the success business organization reduce or solving problem which effect the organization . The modern business is very complex. Due to scientific and technological development, changes are taking place very fast in every business field. Following are the basic personal skills or qualities which a good businessman must possess:

1. Ability to Plan :A businessman, if he wants to shine in business, must have the ability to plan and organize it.

2. Activator He had to activate his workers. If he activates his workers then this is good for business.

3. Bold or Courage :Courage is a great asset of a businessman. A good businessman should be a courageous and bold person. May be his some angry decisions gave him loss in future, so he has to be courageous and be bold.

4. Cooperation :A good businessman should have to cooperate with his workers. With the help of cooperation with his workers he can run his business well.

5. Courtesy: Courtesy is to business what oil is to machinery. It costs nothing but wins a reputation. So businessman has to win the heart of everyone with his polite manners.

6. Decision Making: A good businessman should be a good and quick decision maker. Quick decision of a businessman is an important asset of businessman. And businessman has to know that his quick decision will give him benefit or not.

7. Discipline: A good businessman should have to care about the discipline of the business. If he doesn’t care about the discipline then nobody (who concern to his business) obeys the discipline and business can’t go well.

8. Evaluator: A businessman has to check himself that how he is working. This thing can make the business good in progress.

9. Foresight: A good businessman must have the quality of foresight. He must keep in touch with the business world. He should move about and see what is going on for he has to estimate new wants and new inventions for creating fresh demands.

10. Honesty: A businessman should be honest in dealing with others. Honesty of a businessman helps him in his business.

11. Hardworking: A businessman must be hard working. Without have working no business can be successful. If the owner is not hard working then other workers of the business can’t be hardworking.

12. Initiation: The business world is moving at a very fast speed. A businessman should have the ability to take initiative by producing new things and new methods of marketing the products and services.

13. Knowledge: A good businessman should have knowledge of his business. It should be supplemented by the knowledge of trade, finance, marketing, income tax, etc.

14. Leadership: Leaders are not made, they are born; but the businessman has to get some qualities of a leader. With the help of leadership a businessman can control his business and workers.

15. Negotiator: If a businessman is a good negotiator, then he can run his business well, because without good communication he can’t impress his consumer.

16. Personality: A businessman should have a graceful personality because it can impress his customers. If his personality is not good or not graceful then his business can’t go well.

1.3 Significance of study

Why is the business planning is important and why it will be done in concert with a strategy? What benefits will occur by this study?

For the success of any organization, planning should be the most important to achieve the goal. Without the planning organization never achieve the target of goal and objectives of organization by view of macro perspective business is done in a global market. Because of the growing new technology and the Internet. Time and distance continue to become less and less relevant. In a view of micro, the level of any individual company or organization strategic planning provides a company purpose and direction.

It is importance to owners of organization and high level managers who make plans and policies to achieving goals. The main benefit of this planning is make no mistake in business running when the planning is making 1st find out the weakness of organization and try to removed this weakness which get the success and the goal of organization.

1.4 Research Questions and/or Hypotheses and/or Null Hypotheses

The objectives of any good business research should be how to better promote the business in an economically sound manner and to increase the businesses net profit, exposure, and ensure its continuity.

Another characteristic of good business research is judging local problems of the environment in which establishment is going to operate. If the business is manufacturing a specific product, look at the market size and options on how to produce the product. characteristic of good business research objectives is flexibility .

To identify about the policies and strategy of other competitors of the market. what they are doing?

1.5 Analytical Procedure:

Analytical procedure helps to find out the target objectives. It refers to the procedure of using the analytical statistical tools and data. There are not any specific tools that can be used to find out the desired outcome. For the study it will be used the SWOT analysis System has been used. A brief description of the SWOT

1.5.1 Internal analysis of the organization

The SWOT analyse is made by observing and describing ( it is a qualitative analyse ) the characteristics of our business and of the market where it is found. The SWOT analysis allows to detect the strength of our company and the threats of the environment.

S -Strength : describes the resources and the skills that our company has acquired. What is the difference from the company? What can we improve ?

W -Weakness : describes the factors in which we have unfavourable position with regard to the competence. In order to make the internal analysis.

In order to make the internal analysis , has to be considered the analysis of resources, of activities and risks.

External analysis of the organization

O -Opportunities : they describe the possible markets, business niches that can be seen by everyone, but if they are not recognized on time that would mean the loss of the competitive advantage.

T -Threats : The describe the factors that cab put in danger the survival of the organization , if they are recognised on time they can dodge or they can become opportunities.

In order to make the internal analysis we have to take into account the analysis of the environment, of the interested groups, the legislation, and the demographic and political aspects.

Once we have described the threats, the opportunities, the strengths and the weakness of the company, we can construct the SWOT matrix. Matrix let us visualise and summarised the present situation of the company.




The main objectives of this chapter is to review the previous and existing literature which is close to the research topic and objectives. In this chapter we get the clear vision about the business organization and the short description about the strategies planning ,policies, knowledge management, business environment, causes ,process and the symptoms of the business failure and how to alignment . The research will be predictably analysis under different views which relevant different methods of business prediction. This study business failure helps to sustain long term run in market, save form competitors and how to manage the internal and external environmental problems of business organization for the success of business organization.

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2.2 Overview of business organization

According to recent statistics from the UK’sMinistry of Justice, almost 12,000 companies filed for insolvency in 2007 in England and Wales.This number is forecast to increase significantly (to around 13,500 companies) in 2008 (Financial Times, 2 January 2008) as the financial crisis hits businesses in the wider economy. Smaller companies are likely to suffer most because of a slowing economy and the increasing costs of borrowing in a deteriorating business environment.

Business organization refers to that economic activity which is conduct on regular basis to earning profit motive through the production and sale of goods and service. In other word business means to remain busy in any activity like buying and selling production or distribution goods or service.

Shrestha k.N.( 2010 pp.4-5) says that business organization which are formed for earning profit. they are mainly concerned with producing goods and service of value to the society .companies ,partnership, sole trading and joint stock are organised along this lines with a profit motive to survive against competition , future expansion and development.

Taylor , F.W. (1856-19150 ) says a business organization usually in the manufacturing field, which provides students with education and training to degree standard.(David A.staat business management.1991,1999,2004 Routledge is an imprint of the Taylor and Francis group.)

Much of today’s economic and business thinking is based on the ideas of the scientific movements towards the end of the nineteenth century one of the main underlying assumptions was that the economy and the business environment form a closed system in a state of dynamic equilibrium. By Beinhocker, (1997) . Ansoff’s (1993) states the model of environmental turbulence which shows the extreme case of discontinuous unpredictably changing environment. The main objective of purposed organizations lack of complete information or different organization interpret the same information in different way? And business is the lifeblood of capitalist society. At once time or another we have all consider going into business. Everyday millions of people in the US buy goods from business one pay tax. Which invest on another business. The tax generated by these business help support a government infrastructure that is unrivalled in the modern world by Bevans(1961)

2.3 Business Strategy

Mc. kiernan (1997) identified four strands to strategy theory and the knowledge based approach to strategy is sometimes subsumed into core competence or resource based strategy. We believed, however that knowledge -based strategy has its own distinctive characteristic at the same time as providing a fundamental underpinning for all the other theories of strategic Management . strategic learning is concerned with the process by which leaders, managers and organization learn about themselves. Their business and environment. Strategic learning is vital to development of the strategic knowledge upon which superior performance is based by Nokaka(1991)and other authors Chandler (1962) state that the strategy is determination of the basic long term and objectives of an enterprise and the adoption of course of action and all the allocation of resources necessary for carrying out of these goal .Porter (1996) state that positioning-once the heart of strategy is rejected as too static for today’s dynamic market and changing technological.

2.3.1 Strategy Formation

According to Teeca. et al (1995) says that the fundamental questions in the field of strategic management is how firm achieve and sustain competitive advantage. By the development a dynamic capabilities approach, the four questions helps define the field of strategic management its boundaries as they exist today, it concerns and how it can makes contribution to the practice of management the questions are:

How the firm behave?

Why are firms different?

What is the function of or value added by the headquarters unit in a multi -business firm?

What determines the success or failure of the firm in international or national competition?

2.3.2 Business Environment

The business firm is a micro-economic- unit which firm operates. Bye environment the reference is the set of external factor on forces which operation of the business firm. The business firm individually doesn’t have much influence on the environment.

Types of business Environment

Economic Environmental business

Non – Economic Environmental business

Economic Environmental business

Economic Environmental business activities involve transformation of inputs into outputs , supply of these market place and exchange of the products with the buyer for money, Business organization while performing these economic activities are constrained by the availability of resource ,land ,labour, capital raw materials and finance. Which related internal factors of business environment by Pailwar (2010) and another author states about non economical environmental business or External Environment. Reddy (2004) states that the environment is so complex and dynamic that it is difficult to describe and analysis because it is the external factor which automatically effect to the organization from outside the business organization such as:

Political environment

Social environment

Demographic environment

Technological environment

Natural environment and

Historical environment

Organization ; Changing organizational characteristic

Organization success when they operate in states of stability and harmony to adopt intentionally to the environment. Lowendahl (2005) concludes the the increasing complexity is transforming the field of strategic management form a search for general solution to an understanding and acceptance that different solution can working equally well. In post modern situation the nation of garnd (formal) theory model or frame work that applies to all organizations in a population collapses, as the characteristics of the organization by definition will be local, unique and temporary.

2.4 Knowledge management:

This is the idea for how knowledge is manage like including knowledge management strategy and implementation by the definition of Webester (1992) Relationship management and marketing reflect these changing in management and strategy. These definitions embrace a verity of partners, not just customer and the term relationship can mean a variety of things depending on how it applied. It can be taken to mean only type of cooperation, form a conceive supply relationship to strategies evidence. And another author Donaldson (1998)said the managing various relationship types may place emphasis on managerial style and associated organizational culture. And organization using implementation methods in dealing with one supplier might find it a challenge to change to relationship approach.

: identifying customer needs and requirements

:anticipating future trends and monitoring environmental forces

: satisfying customers existing and future requirements through managing the product or service packing, optimising value for money pricing and maximizing availability and delivery while promoting and selling benefits in the most effective way.

:profit, ensuring that the company will be able to provide this process in the future.

2.4.1 Causes, Process and Remedies

The failure process of the firm can be compared with the evolution of a disease in a human beings. In the same way failure itself is comparable to death. The causes of failure are often associated with management adequacy. These causes lead to occurrence of symptoms which are observable from the deterioration of financial ration.

From the statement given by Luoma and Laitinen (1991) we can infer that a) failure is not a sudden even, it takes some time (“evolution of the disease”) for a company to become bankruptcy b) financial ratios are only symptoms of failure and c) failure process is triggered off by something causes.

Unfortunately , very few authors Altman(1971) Vernimmen(1978) Dambolena and Knoury (1980) Koenig (1985) or Markidakis (1991) are really interested in bankruptcy. Even if the list of causes may be different across studies, we can distinguish two main causes of failure. Endogenous and exogenous factors. The main causes within organization is managerial incompetence this is the case in France and Belgium but also in US where 90% of bankruptcy can be impute to this factor Dambolena and Khoury (1980) add that bad management appears through lack of responsibilities to change in technology. Insufficient consideration for cost factor poor knowledge of financial matters.

What exogenous factors concern, Altman (1971) mentions that the change in the nations failure rate is negatively associated with the change in overall economic activities Guilhot (2000) mention that there is a systematic correlation between failure and economic crises stock market performance, and supply condition. That’s why author Altman (1971) include in their macroeconomic factor. The influence of macroeconomic factor on bankruptcy seems particularly important. The numbers of bankruptcy in 2000is decreasing in Belgium to the relatively good and stable economic situation. But Vernimmen (1997) state again that the failure of one firms customer was the main causes of firms bankruptcy in France. This statement introduced bankruptcy prediction is very important topic because failure of a particular company could have unfortunate impact on ither entities.

2.4.2 The symptoms of Failure

We already point out that the most of the authors rely on symptoms of the diseased in order to predict failure or bankruptcy. These symptoms can be qualitative or quantitative.(financial ratios) variables. Altman (1968) states that the excluding applications on too typical sector like banking or insurance. Where more and more ratios were used. Its strictly impossible to give here all ratios.

We noticed that the most frequently used financial ratios are CA/CL, WC/TA, EBIT/TA and NI/TA. It was necessary to included non-financial and more qualitative information in the model Altman and Loris (1976) and Vernimmen (1978) Dimitras et. Al (1995) Greco et al. (1998) really including as qualitative information bankruptcy predication model. In this section they analysis as qualitative information managers works experiences. Firms market niche-position special competitive advantage of firm or market flexibility. Cormier et al.(1994) include other qualitative indicators like investment in a new sector, change in the depreciation method or change in ownership.

Few authors Abdel-Khalik and El-Sheshi (1980) used trend data in the form of the average change over several years in different ratio. It seems that trends variable have a greater ability to draw out information from balance sheet data and more able to deficit “creating accounting”.

Mader (1975) Mensah (1984) Khalos(1985) or Taffer(1985) proved the contrary. The size of the firm seems also have an impact on the financial disease of the firm of the firm. Bryant (1971) and Laitinen (1992) or Jo and Han (1997) shows the incorporate the size represented, like total assets , sales and the numbers of employees.

2.5 Strategic Alignment

HR and Business leader must think of strategy and its role in the border HR. Programmes and practice in a holistic way answering these questions as they determine the policies and practice that will be their basis of their business culture.

What do we do?

How should we do it?

What all skills do we need to be successful?

What skills do we need survive for future?

It means the link between all of the activities that are conduct as part of human resources management and the human resources policy. This links explain the direct application of every single human resource policy, practice and programme support the business.

Brocke and Rosemann (2010) conclude that the business process management requires an alignment with the organizational strategy. Only such tight alignment ensure relevance business process management and a valuable contribution to the corporate long term priorities. Alignment doesn’t have to be a unidirectional in the typical sense that a BPM strategy’s oriented towards the corporate strategy.

Source: Handbook on process management by J. Vom Brocke and M. Rosemaan (2010) Delivering Business strategy through process management

It should be recognized that two phases will naturally build off one another in a never ending cycle from year to year. It formulates enhanced by and planned capabilities from the previous round.



3.1 Introduction

This chapter deals with the research design, justification for the selected study unit, nature and source of data, data collection method, data processing and SWOT analysis The word methodology is defined as a system which comprises the principles, practices and procedures which are applied to a specific branch of knowledge. Methodology refers to the way in which information is found or the way something is done. Methodology includes the methods, techniques and procedures which are used to collect and analyse information.

3.2 Research Design

A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. It is the plan structure and strategy on investigations conceived for obtaining answers to research questions and to control variances. To achieve the objective of this study, descriptive and analytical research designs have been used. To evaluate operating performance and the present condition of market, the SWOT analysis is taken as a secondary data analysis tool for this study.

3.3 Source of Data

This study is conducted primarily on the basis of secondary data. The data relating to the theoretical based on the business organizations such as impact of internal and external business environment which effect directly to organization . In this cases, the primary data is not taken for the accuracy of analysis. Because it is not possible and also difficult to collect primary data. Supplementary data and information are collected from existing research, journals, news, books and websites.

3.4 Appropriate Research Method

For this subject we can choose any method like the Description, explanation, qualitative and quantitative is the methods to collection and analysis of data.

3.4.1 Description Method : to describe a behaviour or type of subject not to look for any specific relationships, nor to correlate 2 or more variables. It can acquire a lot of information through description. It can be used as an indirect test of a theory or model some behaviours/situations cannot be studied any other way to general categories of descriptive designs: surveys & observational studies.

3.4.2 Explanatory Method: Explanatory research focuses on why questions. For example, it is one thing to describe the crime rate in a country, to examine trends over time or to compare the rates in different countries. It is quite a different thing to develop explanations about why the crime rate is as high as it is, why some types of crime are increasing or why the rate is higher in some countries than in others.

3.4.3 Qualitative Method : The design of qualitative research is probably the most flexible of the various experimental techniques, encompassing a variety of accepted methods and structures. From an individual case study to an extensive survey, this type of study still needs to be carefully constructed and designed, but there is no standardized structure.

3.4.4 Quantitative method: Quantitative research is all about quantifying the relationships between variables. Variables are the things you measure on your subjects, which can be humans, animals, or cells. Variables can represent subject characteristics (e.g. weight, height, sex), the things are really interested in variables representing the timing of measurements and nature of any treatments subjects receive. To quantify the relationships between these variables, we use values of effect statistics such as the correlation coefficient, the difference between means of something in two groups, or the relative frequency of something in two groups.

3.4.5 Types of data collection

i) Primary Data: this is the data which is collected by the first research person. In this method the data collect himself using methods such as interviews and questionnaires. The key point here is that the data he/she collect is unique to him and his/her research and, until he/she publish, no one else has access to it. There are many methods of collecting primary data and the main methods include: Questionnaires, interviews, focus group interviews, observation, case-studies, diaries ,critical incidents


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