Business failure refers to a company ceasing operations following its inability to make a profit or to bring in enough revenue to cover its expenses. A profitable business can fail if it does not generate adequate cash flow to meet expenses.[1]
Businesses can fail as a result of wars, recessions, high taxation, high interest rates, excessive regulations, poor management decisions, insufficient marketing, inability to compete with other similar businesses, or a lack of interest from the public in the business's offerings. Some businesses may choose to shut down prior to an expected failure. Others may continue to operate until they are forced out by a court order.
The Small Business Administration, in an article on small business failure, lists additional reasons for failure from Michael Ames' book on "Small Business Management":
A study published in 2014 by the Turnaround Management Society assesses that most business crises are caused by the mistakes of upper management. The most frequent causes of a crisis are that the management continued with a strategy that was no longer working for the company (54.6%), and that they lost touch with the market and their customers and did not want to adapt to changes occurring around them (51.6%). Having a clear strategy that is communicated well to all operational areas, one that uses and builds USPs, is desirable for every company but is often not the case. Incorrect strategic decisions (39.4%) are often made because of the lack of a clear strategy, and they can have a significant impact on a company’s financial position in the market.
There are many opinions about the most important reason that businesses fail:
After closing a business may be dissolved and have its assets redistributed after filing articles of dissolution. A business that operates multiple locations may continue to operate, but close some of its locations that are under-performing, or in the case of a manufacturer, cease production of some of its products that are not selling well. Some failing companies are purchased by a new owner who may be able to run the company better, and some are merged with another company that will then take over its operations. Some businesses save themselves through bankruptcy or bankruptcy protection, thereby allowing themselves to restructure.
The UK Government announced in 2018 that it was asking major suppliers to government to make plans for other organisations to step in in the event of their business failing. Suppliers Capita, Serco and Sopra Steria had offered to pilot best practice in this field. David Lidington MP, who was then Cabinet Secretary, referred to learning from the events surrounding the collapse of Carillion, for which the government as customer was not well prepared. He commented that when Carillion failed "it was left to government to step in - and it did. But we did not have the benefit of key organisational information that could have smoothed the management of the liquidation. By ensuring contingency plans can be quickly put in place in the very rare event of supplier failure, we will be better prepared to maintain continuity of critical public services." The plans have been referred to as "living wills" - "a set of arrangements to facilitate the transfer of a contract back to Government or to another supplier if required".[3]
Debt-related failures: