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Business Bursts: Failure

Updated Wednesday, 25th November 2015

There's many reasons why even great companies can fail—and a difficult economy can exacerbate the problems

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James Fleck

Business failure comes about for a number of reasons.  It’s where overall the business simply is not able to survive, and it may be cashflow problems, it may be a collapse in confidence that leads to the share value going down, as we've seen recently with BP, so that then they become a target for takeover, it may be a failure to secure a market for the products being offered, or it may be a lack of attention to that market, so that the precise needs in the market are not being addressed.  And finally it may be inadequate products, which could be a result of a lack of innovation.

 

Leslie Budd

In the last ten years, in all the advanced economies, we've forgotten the business cycle, that things go up and things go down and you have booms and you have slumps.  And if you like there’s been a sort of double whammy because to bail out the financial system and the banking system, governments all round the world had to intervene and you now have a fiscal crisis, whereby there’s rising public debts, rising public deficits and governments have limited room for manoeuvre for boosting the economy.  In particular, they're limited in their room for manoeuvre for creating opportunities out of, or new phoenixes out of the ashes of the recession.  Now that brings us to a famous economist called Joseph Schumpeter who turned the phrase creative destruction, that out of every business failure or every economic slump there were new opportunities for new kinds of businesses, often technologically driven, to develop.  At the moment we don’t seem to be seeing that.

James Fleck

There are a number of factors that can lead to business failure.  The most straightforward I guess is simple lack of cashflow, that the firm doesn’t have enough money to pay ongoing bills or wages, and we've seen quite a lot of that with the credit crunch, where it’s been more difficult for firms to, or more expensive for them, to acquire cashflow.  Another factor in business failure is where the organisation has failed to secure a market, so it might have a good idea but they don’t actually know who they can sell that to.  And yet another factor is even where a market is identified, if there’s not sufficient attention to the market so the specific needs of the market are being addressed, then that can lead to a failure of sustainability for the organisation.

Colin Gray

So in some ways, this recession has sorted out the sheep from the goats in a way, because some firms were coasting along and they didn’t have to do very much, and all of a sudden that actually becomes quite tough and they’ve actually got to go and sell their product and actually kind of work out which customers they really want to be going for, the ones that are likely to want it and likely to be paying, more likely to pay.  So learning more about your customers, again they don’t, once the transaction’s closed that’s done and they want to think about the next thing, so there’s all that to take into account as well.  It’s quite complex, so it’s not really surprising in my view that, particularly if the recession starts to bite again, that we’ll be looking at a lot more reality, looking at more failures amongst the self-employed, amongst the very small businesses.

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