Business failure is when a company is forced to close because it is unable to generate enough income to cover its expenses. If business owners predict that failure is evident, some will cease operating immediately; others operate until they run out of cash. Established businesses tend to fail because of economic conditions, political changes, or management decisions. The failure of new businesses is mostly the result of poor planning or decision-making.
Economic conditions can prompt business failure when consumers change their spending habits, such as during recessions, depressions and times of war. As consumers lose confidence in the future of the economy, they reduce spending to save money. They purchase only what is needed and delay buying larger items, such as cars, homes and appliances. Businesses must have sufficient cash on hand during these economic down times to prevent failure while waiting for consumers to start making purchases again.
Politics influence business failure when new laws or regulations are created that result in businesses having to pay higher taxes or modify products or facilities. The political climate is constantly changing, with consumer groups advocating for such things as more protection and a greener environment. These changes can especially strain smaller businesses, because they may not be able to adjust their operations to remain profitable. Businesses in industries that are sensitive to changing laws and regulations, such as health care and insurance, should have contingency plans in case new policies are established.
Poor planning and decision-making are often the causes of business failure. This includes management underestimating the competitive landscape, using insufficient marketing tactics, or not researching consumer trends. Threats of failure can be counteracted if managers detect problems in advance and develop strategies to either prevent the threat from occurring or reduce its effects. While businesses do not have control over economic or political reasons for business failure, they can decrease the possibility of failure by having strong managers and strategic plans in place.
Preventing business failure is not always possible. No matter the size or industry of the business, it should have a system in place to detect if the business is on a path to failure. Businesses should have strategies for countering all perceivable internal and external threats. If a business owner is aware of pending legislation that may hurt his business, he should immediately find ways to remain profitable instead of waiting until the legislation is passed. Only a strong management team and planning can help a business avoid business failure.