Question

Explain the reasons for business failures. Or Satnam, an IIT-IIM graduate, started three chemists shops at Amritsar, Patiala and Chandigarh in the name of ‘Quality Medicines’. Encouraged with the success of these shops Satnam opened 50 more shops in different parts of Punjab. His strategy was to cut price, focus on lower and upper middle class and open shops near hospitals. He operated on very thin margins. But he was not able to maintain sufficient funds to meet the day-to-day expenses of the business. The staff at the shops did not give much attention to the customers and there was very poor system of control. Because of this mismanagement he started incurring huge losses and his business failed.Based on the above paragraph, identify and explain any four causes of business failure of Satnam.

Answer 1

Following are the reasons of business failures: 

1. Lack of industry experience: The internal resources of a firm has to match the needs of the environment to which the firm belongs. Lack of experience in the field will lead to poor organization of a firm and resources. This may lead to loss and business failure. 

2. Inadequate financing: Financing is the lifeblood of a business at every stage. Many businesses fail due to lack of proper financing channels. The lack of planning for funding to support opportunities for growth is the root cause of failure. Planning in advance, rather than looking for financing just when needed, is a good practice. It includes lack of sufficient awareness of the costs involved in raising capital, lack of alternative sources in case of rejection from financiers, etc. 

3. Lack of adequate cash flow: Cash flow is the measure of a firm’s ability to maintain sufficient funding to meet its expenses for the day-to-day activities of the business. Many businesses fail because owners have a difficult time projecting what cash will come in every month, and thus, how much can be produced. Cash flow projections and its knowledge will help owners to understand how much they can afford to spend. 

4. Poor business planning: Ninety per cent of business failures are caused by a lack of general business management skills and planning. Owner, manager must have sufficient knowledge of such skills. This will lead to proper understanding of the practical situation which can then be resolved using basic management skills. 

5. Management incompetence:Ninety per cent of business failures are associated with “management inadequacy”, which can be due to either management inexperience or incompetence. A good strategic plan is only good as the management’s ability to implement changes in day- to-day operations. 

6. Ignoring the competition: Customers always looking for the better deal. If competition offers better products, services, or prices, the customers will succeed at the expense of the business. So keeping an eye on competitors and positioning the products accordingly is vital to staying in business. 

7. Unworkable goals: Setting goals is one thing and setting workable goals is another. Enterprises are influenced by uncertainty. Setting realistic goals, within the bounds of acceptable risk taking and optimism, is important. 

8. Diminished customer base 

9. Uncontrolled growth 

10. Inappropriate location 

11. Poor system of control 

12. Lack of entrepreneurial skills.