Why businesses fail Cambridge IGCSE Business Studies (9–1) revision
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In plain words
Most new businesses do not last five years. They rarely fail because the idea was bad. More often the owner ran out of cash, or did not know how to manage, or the world changed around them.
Knowing the causes is the first step to avoiding them.
5 things to know
- Lack of management skills: the owner may be good at the trade but poor at planning, finance or handling staff.
- Liquidity (cash-flow) problems: the business cannot pay its bills when they are due, even if it is making a profit on paper.
- Changes in the business environment: new competitors, new technology, a recession, or a change in what customers want.
- Expanding too quickly, poor planning and a failure to adapt can each bring a business down.
- New businesses are at greater risk: the owner has little experience, finance is limited, and there are no loyal customers or reputation yet.
Tips and tricks
- A profitable business can still fail. If customers have not paid yet and the rent is due today, it has run out of cash. Profit and cash are different things.
- Link the cause to what happens next: "new competitor, so sales fall, so cash runs short, so suppliers cannot be paid".
It lands in your notebook with its questions as flashcards.
Why businesses fail: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is a common cause of business failure?
A business that cannot pay its bills cannot keep trading.
Why are new businesses at greater risk of failing?
There is little to fall back on if sales are slow at first.
A shop loses customers when a large competitor opens nearby. This cause of failure is
Something outside the business has changed.
What is a liquidity problem?
Liquidity is about cash being available at the right time.
A business that fails to change its products when customers' tastes change has
Markets move on, and a business must move with them.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Why businesses fail
Cambridge IGCSE Business Studies (9–1) 0986 · 8 marks · papermunch.org
Name ______________________________ Date ______________
State two reasons why a business might fail.[2]
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Any two of: lack of management skills, cash-flow (liquidity) problems, increased competition, failure to adapt to changes in the market, expanding too quickly.
Explain why a new business is more likely to fail than an established one.[3]
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Its owner has less experience of running a business, it has limited finance to survive a bad period, and it has not yet built up regular customers or a reputation.
Explain how a profitable business can fail because of a cash-flow problem.[3]
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It may have sold goods on credit and not yet been paid. If it has no cash to pay suppliers, wages or rent when they are due, it can be forced to close even though its sales are worth more than its costs.
Answers: Why businesses fail
- 1. Any two of: lack of management skills, cash-flow (liquidity) problems, increased competition, failure to adapt to changes in the market, expanding too quickly.
- 2. Its owner has less experience of running a business, it has limited finance to survive a bad period, and it has not yet built up regular customers or a reputation.
- 3. It may have sold goods on credit and not yet been paid. If it has no cash to pay suppliers, wages or rent when they are due, it can be forced to close even though its sales are worth more than its costs.