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What is Business Failure?

By Carrieanne Larmore
Updated: Jan 23, 2024

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.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By indigomoth — On Mar 31, 2013

It always makes me kind of sad when a small business closes after only a few months or a year, particularly when it's one that I enjoyed. In my home town there always seems to be a lot of independent fashion shops, where someone is selling their own and other handmade clothes and accessories.

And they almost always seem to fail, I don't know why. I try to buy at those kinds of places if I can, just so that they get local support but I think most people just go for the cheapest option.

By KoiwiGal — On Mar 30, 2013

@Ana1234 - Unfortunately, most of the time it seems like it's almost unethical to be selling people these kinds of products when they are struggling. I always hated those stories of poor families where the mother had money for smokes but not for food.

Besides, I don't think it has that much to do with the economy. It's all about planning and making sure you have something that will make money. Personally, I think the problem that causes the high small business failure rate is that they don't plan far enough ahead. Most businesses won't make money until the second, or even the third year. If that's not in your plan, you're probably going to fail.

By Ana1234 — On Mar 29, 2013

One thing that I've always found interesting is the kinds of businesses that thrive and the kinds that fail during an economic downturn. Because it's not always the ones you'd expect.

For example, the entertainment industry almost always undergoes a renaissance during this kind of time because people are looking for a cheap means of escape from reality. But, for example, the literary section becomes less used than the romance and science fiction section, because people are looking for a fantasy not for commentary on their reality.

Of course, products like cigarettes, alcohol and fast food always do better as well, but that's hardly surprising.

If you're in an economic downturn and are looking for business ideas, don't let anyone tell you there's no money to be made. You just need to find the right product.

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