Posted by Chester Morton / Saturday, 21 October 2017 / No comments
The external causes of business failure
Introduction
Usually, Businesses aim to make profit. However, a number of factors can cause the business to fail in its objective to make profit and grow.
The causes of Business failure can be divided into Internal and External. Internal causes are those causes that happen within confines of the business itself.
One thing that differentiate internal causes from the external ones is that internal causes are predictable and to large extent the organization has control over them. The external causes, on the other hand are those that occur outside the business. Usually, the company has little or no control over.
EXTERNAL CAUSES OF BUSINESS FAILURE
Poor Economic Environment
When the economy of the country in which the business is operating is not doing well, businesses in that country may also experience difficulties. A severe economic recession can cause some businesses to close down.
This is because a fall in the economic growth often results in consumers buying less as their purchasing power falls. There is often a high inflation resulting in high cost of production and a shortfall in raw materials as their cost of production goes up. Customers may shift from buying the company's product to cheaper substitutes. All these could cause the business to fail.
Catastrophic Unpredictable Events
It is difficult for managers of businesses to foresee naturally occurring disasters such as earthquakes, storms, floods, fire well ahead of time. This the same with man-made disasters such as acts of terrorism. To protect a business against such an occurrence is usually done by taking an insurance to cover the risk so that in case any of these disasters occur, the business can be paid by the assurance company. Even with an insurance cover, a delay in getting the claim payment from the insurance company can negatively affect the business' cash flow, causing the business to fail.
Governmental Measures and International Developments
When governments come out with new rules and regulation some businesses operating in a particular sector can be badly affected. For example, if government should raise the minimum deposit of micro-finance companies from say 200,000 USD to 800,000 USD, it means that all micro-finance companies who cannot raise the required capital must fold up or close down.
Similarly, happenings in international developments such as trade agreements, treaties and wars can have damaging consequences for a business. For example, if you are a producer of poultry products and the government of your country signs a trade deal with another country to export poultry products into your country at a much cheaper rate. This could lead to a situation where people would stop buying from you as they shift to the imported cheaper one. This shall cause the business to fail.
Environmental Protection and Other Regulatory Requirements
When laws are passed to protect the environment and society as a whole, the effects on business could be disastrous. Complying to strict environmental protection laws can cost money. For example, if your company generates special waste that can be toxic to the environment, government can pass regulation as to how those kinds of waste must be disposed of. This could mean that you would now require extra cost to properly dispose of the waste. This can be a financial burden which can reduce your profit margins and dry up your cash flow. In cases where you do not comply with the regulation for disposing of such waste, the government can impose heavy fines and penalties which could affect your business.
Bankruptcy of Main Customer or Supplier
Over-dependence on one major customer or supplier can cause a business to fail. The risk involved in over-depending on one customer or supplier is that when this customer or supplier goes bankrupt, the business might find it difficult to find another customer or supplier within a short space of time to let the business flow as usual. While waiting to find another customer or supplier, workers wold be paid, where business premise is rented, rent would continue to be paid. Other overhead costs such electricity bills when production or selling is not taking place can drive the business into failure.
