2.3.3 Business Failure | Edexcel A Level Business Revision Notes 2017

Internal & External Causes of Business Failure

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The main internal reasons for business failure

Ineffective management is a key cause of business failure
Leaders may lack the experience or skills to run a business effectively, especially during periods of crisis
Financial factors (e.g. a lack cash flow or working capital) can cause swift business failure as it becomes difficult to operate on a day-to-day basis

The main external reasons for business failure

Businesses also fail as a result of factors beyond their direct control
A change in legislation can mean that products or processes may require significant redesign or withdrawal
- E.g. The UK government announced that diesel vehicles are banned from 2030. Car manufacturers are switching to the production of greener petrol and electric vehicles and some have moved production process outside of the UK to reduce costs
  - Several prominent vehicle manufacturers will likely fail in the future as a result of these changes
Economic challenges (e.g. rising interest rates or a recession) are a key cause of business failure
- Especially true for businesses that rely heavily on borrowing or that sell items that require customer to borrow money to finance their purchase
The entry of new competitors into a market can cause significant problems for incumbent businesses who may have to slash prices or spend heavily on promotional activity to maintain their market share
- If a business has existing weaknesses the entry of a new competitor can quicken its failure