Business failure

Business failure is the risk that a business does not survive or has to stop trading. When a business closes, its owners lose the income and money they put in, and staff lose their jobs. Failure can hit a brand-new venture with little cash and few customers, but it can also hit a business that has traded for decades.

One clear cause of failure is not having enough finance to meet its debts. Bills for rent, stock and loan repayments fall due whether or not sales have been strong, so a business can run out of cash and be forced to close even when its product is good. Failure is not the same as financial loss: a business that keeps trading can still lose money, but a failed business has stopped trading altogether.

Why businesses fail

• Insufficient demand — too few customers want the product, so revenue never covers costs. A new skateboard shop in a small town may find only a handful of buyers each week.
• Poor cash-flow management — money leaves the business before payments from customers arrive, leaving it unable to pay wages or suppliers.
• Failure to respond to changing market conditions — customers move on and the business does not. A high-street photography shop that ignored phone cameras and online printing lost the customers it once relied on.
• External factors beyond the business's control — a recession, a change in the law or a sudden rise in costs can reduce sales or raise expenses whatever the owner does.

External factors and the risk–reward balance

Factors outside the owner's control raise the risk — the chance of loss — and so reduce the chance that the reward will be achieved. If a recession cuts household spending, a garden centre's sales may fall just as its loan repayments stay the same. Because the owner cannot control these events, the possibility of failure grows, which is why some people decide the potential profit is not worth the risk.