1. UNIT 2.4 Why do businesses fail?

2. In this section you will learn:  Why some businesses “Go under”?  What can go wrong within the business?  What can affect the business from outside?  How can firms use information to avoid failure?  What does a business do if the cash runs out?

3. In this section you will learn:  What the Business Cycle is  Why businesses need to respond to change?  How managing resources can contribute to success or failure?  How a business faces up to failure?

4. Why do businesses fail?  In recent years more and more people have started up their own businesses –  Virgin – airlines, trains records etc – Richard Branson  The Body Shop – Anita Roddick  Kwik Fit – Tom Farmer Unfortunately not all business are a success – about 80% fail within a short time.

5. Reasons why businesses fail  Fierce competition  Economic recession  Cash flow problems  Business not moving with the times  Poor resource management  External factors – war, floods, political factors

6. Reasons why businesses fail COMPETITION – COMPETITORS HAVE:  Better products  Identified the market more clearly  Set their prices extremely low to eliminate competition – Destroyer pricing – prices rise once competitors have been destroyed.  Lower prices – importing from abroad

7. Reasons why businesses fail RECESSION  Financially economy slows down  Less produced, less spent, less bought  Obtaining loans is different  Unemployment usually increases in recession

8. Reasons why businesses fail CASH FLOW PROBLEMS A business should prepare cash budgets etc “If you fail to plan, you plan to fail”  Businesses should prepare for future downturns by building up reserves

9. Reasons why businesses fail NOT MOVING WITH THE TIMES  Product is obsolete  Production outdated – need for automation  Unfashionable  Marketing/ advertising ineffective  Product end of life cycle

10. Reasons why businesses fail POOR RESOURCE MANAGEMENT Businesses not managing their resources properly  Car parks not properly maintained  Shabby premises, fault doors, poor heating  Badly maintained equipment

11. Reasons why businesses fail POOR RESOURCE MANAGEMENT  Lack of efficient security leading to pilfering/stealing  Failure to keep efficient records resulting is asset theft  Demotivated staff –  High prices resulting in drop in market share

12. Reasons why businesses fail EXTERNAL FACTORS – PEST factors  Political – new laws  Economic – increasing interest rates  Socio-cultural – ban on smoking in public  Technological – important to keep up with technological advances.

13. THE BUSINESS CYCLE The Business Cycle shows the pattern of UPS (Booms) and DOWNS (slumps) over a period of time in the economy. It shows the level of economic activity.

14. THE BUSINESS CYCLE

15. How the level of economic activity can affect a business? Businesses are affected by each stage of the Business Cycle. Different types of businesses can be affected in different ways.

16. How the level of economic activity can affect a business? On the downturn:  Unemployment increases  Some people will reduce their spending  Some people may try and save “for a rainy day”  This will mean that fewer goods and services are purchased so organisations will produce less and output will fall.

17. THE ECONOMY IS IN RECESSION Businesses tend to do badly in periods of recession

19. How the level of economic activity can affect a business? As things start to recover:  People will start to buy again  Firms will produce more  The economy starts to grow

20. How the level of economic activity can affect a business? As orders increase:  Firms will employ more workers to produce goods and services  Employment improves and spending power increases  As things start to look good the economy enters the BOOM period.

21. How the level of economic activity can affect a business? But when workers see the firm doing well  They will demand higher wages resulting in higher costs to the business  Businesses may find they cannot always deliver what people want  Prices start to rise due to increased costs and inflation may then increase

22. How the level of economic activity can affect a business? But when workers see the firm doing well  Products become less competitive  Other countries can produce more cheaply  Demand for our country’s products falls The economy is back on the road to recession