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Business failure refers to a company ceasing operations following its inability to make a profit or to bring in enough revenue to cover its expenses. A profitable business can fail if it does not generate adequate cash flow to meet expenses. [1]
Businesses can fail as a result of wars, recessions, high taxation, high interest rates, excessive regulations, poor management decisions, insufficient marketing, inability to compete with other similar businesses, or a lack of interest from the public in the business's offerings. Some businesses may choose to shut down prior to an expected failure. Others may continue to operate until they are forced out by a court order.
The Small Business Administration, in an article on small business failure, [2] lists additional reasons for failure from Michael Ames' book on "Small Business Management": [3]
A study published in 2014 by the Turnaround Management Society assesses that most business crises are caused by the mistakes of upper management. The most frequent causes of a crisis are that the management continued with a strategy that was no longer working for the company (54.6%), and that they lost touch with the market and their customers and did not want to adapt to changes occurring around them (51.6%). Having a clear strategy that is communicated well to all operational areas, one that uses and builds USPs,[ definition needed ] is desirable for every company but is often not the case. Incorrect strategic decisions (39.4%) are often made because of the lack of a clear strategy, and they can have a significant impact on a company’s financial position in the market. [4]
There are many opinions about the most important reason that businesses fail:
After closing a business may be dissolved and have its assets redistributed after filing articles of dissolution. A business that operates multiple locations may continue to operate, but close some of its locations that are under-performing, or in the case of a manufacturer, cease production of some of its products that are not selling well. Some failing companies are purchased by a new owner who may be able to run the company better, and some are merged with another company that will then take over its operations. Some businesses save themselves through bankruptcy or bankruptcy protection, thereby allowing themselves to restructure.
The UK Government announced in 2018 that it was asking major suppliers to government to make plans for other organisations to step in in the event of their business failing. Suppliers Capita, Serco and Sopra Steria had offered to pilot best practice in this field. David Lidington MP, who was then Cabinet Secretary, referred to learning from the events surrounding the collapse of Carillion, for which the government as customer was not well prepared. He commented that when Carillion failed "it was left to government to step in - and it did. But we did not have the benefit of key organisational information that could have smoothed the management of the liquidation. By ensuring contingency plans can be quickly put in place in the very rare event of supplier failure, we will be better prepared to maintain continuity of critical public services." [10] The plans have been referred to as "living wills" - "a set of arrangements to facilitate the transfer of a contract back to Government or to another supplier if required". [11]
Debt-related failures:
KPMG International Limited is a multinational professional services network, and one of the Big Four accounting organizations, along with Ernst & Young (EY), Deloitte, and PwC. The name "KPMG" stands for "Klynveld Peat Marwick Goerdeler". The initialism was chosen when KMG merged with Peat Marwick in 1987.
Serco Group plc is a British multinational defence, health, space, justice, migration, customer services, and transport company. It is headquartered in Hook, Hart, England. The company operates in Continental Europe, the Middle East, the Asia Pacific region, including Australia and Hong Kong, and North America. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
Outsourcing includes both foreign and domestic forms of outside contracting. It is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and assets from one firm to another. The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981 at a time when industrial jobs in the United States were being moved overseas, contributing to the economic and cultural collapse of small, industrial towns.
Small businesses are types of corporations, partnerships, or sole proprietorships which have a small number of employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to apply for government support and qualify for preferential tax policy. The qualifications vary depending on the country and industry. Small businesses range from fifteen employees under the Australian Fair Work Act 2009, fifty employees according to the definition used by the European Union, and fewer than five hundred employees to qualify for many U.S. Small Business Administration programs. While small businesses can also be classified according to other methods, such as annual revenues, shipments, sales, assets, annual gross, net revenue, net profits, the number of employees is one of the most widely used measures.
The Serious Fraud Office (SFO) is a non-ministerial government department of the Government of the United Kingdom that investigates and prosecutes serious or complex fraud and corruption in England, Wales and Northern Ireland. The SFO is accountable to the Attorney General for England and Wales, and was established by the Criminal Justice Act 1987, an Act of the Parliament of the United Kingdom.
Deloitte Touche Tohmatsu Limited, commonly referred to as Deloitte, is a British multinational professional services network. Deloitte is the largest professional services network by revenue and number of employees in the world and is considered one of the Big Four accounting firms along with EY, KPMG and PwC.
Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations.
Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. If financial distress cannot be relieved, it can lead to bankruptcy. Financial distress is usually associated with some costs to the company; these are known as costs of financial distress.
Carillion plc was a British multinational construction and facilities management services company headquartered in Wolverhampton in the United Kingdom, prior to its liquidation in January 2018.
Under-capitalization refers to any situation where a business cannot acquire the funds they need. An under-capitalized business may be one that cannot afford current operational expenses due to a lack of capital, which can trigger bankruptcy, may be one that is over-exposed to risk, or may be one that is financially sound but does not have the funds required to expand to meet market demand.
Steven C. Preston is the president and CEO of Goodwill Industries International. He formerly served as the 14th Secretary of the U.S. Department of Housing and Urban Development from 2008 to 2009 and the 22nd Administrator of the U.S. Small Business Administration from 2006 until his appointment as HUD Secretary. Before entering public service, Preston spent nearly 25 years in financial and operational leadership positions in the private sector.
Concept of the Corporation (1946) is a book by management professor and sociologist Peter Drucker.
National Small Business Week is a national recognition event to honor the United States' top entrepreneurs each year. The distinguished group of small business owners are hailed each year by the U.S. Small Business Administration and a collection of event co-hosts. The 2013 event marks the 60th anniversary of the agency, and the 50th annual Presidential proclamation of National Small Business Week.
Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit, payment, insurance, and other risk management services. Those who involuntarily have no or only limited access to financial services are referred to as the unbanked or underbanked, respectively.
Turnaround management is a process dedicated to corporate renewal. It uses analysis and planning to save troubled companies and return them to solvency, and to identify the reasons for failing performance in the market, and rectify them. Turnaround management involves management review, root failure causes analysis, and SWOT analysis to determine why the company is failing. Once analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency.
Rebel A. Cole is the Lynn Eminent Scholar Professor of Finance in the College of Business at Florida Atlantic University in Boca Raton, Florida, where he has taught since August 2016. He teaches graduate-level classes in corporate finance and financial institutions.
Small and Medium Enterprises (SMEs) are defined by the European Commission as having less than 250 employees, independent and with an annual turnover of no more than €50 million or annual balance sheet of €43 million.
source of business financing refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business activity. There are many ways to finance a new or existing business, each of which features its own benefits and limitations. In the wake of the financial crisis of 2007–08, the availability of traditional types of small business financing dramatically decreased. At the same time, alternative types of small business financing have emerged. In this context, it is instructive to divide the types of small business financing into the two broad categories of traditional and alternative small business financing options.
British Business Bank plc (BBB) is a state-owned economic development bank established by the UK Government. Its aim is to increase the supply of credit to small and medium enterprises (SMEs) as well as providing business advice services. It is structured as a public limited company and is owned by the Department for Business and Trade. The bank has its headquarters in Sheffield.
The Ghana banking crisis was a severe banking crisis that affected Ghana between August 2017 and January 2020. The Bank of Ghana (BoG) allowed several indigenous banks to be taken over by private companies between August 2017 and January 2019 after Nana Akufo-Addo was elected president in December 2016. Most of the indigenous banks had been at the risk of defaulting on their loans, as they had been affected by the economic fallout of the Great Recession, which caused the events leading up to the Arab Spring that occurred in North Africa beginning in 2010. The crisis is the most severe economic crisis to affect Ghana since it became an independent country in 1960. The COVID-19 pandemic arrived in Ghana towards the end of the banking crisis in 2020, dealing further damage to the country's economy.
This article incorporates text published under the British Open Government Licence : Cabinet Office and David Lidington MP, New 'Social Value' contracts to revolutionise government procurement , published 19 November 2018, accessed 20 June 2022
This article incorporates public domain material from websites or documents of the Small Business Administration .
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