Business Failure

Defined and classified Business failure may be defined in various ways. Dun and Bradstreets definition is more specific, however, and with some modifications, it will be adopted in this chapter. 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. References: * http://books.google.com/books =classes+of+business+failures * http://en.wikipedia.org/wiki/Business_failure

Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with information asymmetrie, non-competitive markets, principal-agent problems, externalities, or public goods. The existence of a market failure is often used as a justification for government intervention in a particular market. Economists, especially micro economists, are often concerned with the causes of market failure, and possible means to correct such a failure when it occurs. Such analysis plays an important role in many types of public policy decisions and studies. However, some types of government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations, including attempts to correct market failure, may also lead to an inefficient allocation of resources, sometimes called government failure. Thus, there is sometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions. But either way, if a market failure exists the outcome is not pareto efficient. Mainstream neoclassical and Keynesian economists believe that it may be possible for a government to improve the inefficient market outcome, while several heterodox schools of thought disagree with this. Classified Economic failure
Finance failure

So why do businesses fail?

Business failures are a bit like fires. Something smouldering may be difficult to see but can be relatively easy to put out with little damage or risk if caught early. Once a fire is really ablaze, it is much more obvious, but can be much more difficult to put out as it has become dangerous to deal with, consuming resources, and crucially, cash. Cash is king as the old saying has it. And no one believes this more firmly than turnaround professionals because fundamentally businesses fail when they run out of cash. And while there are well established ways of tackling businesses that are starting to burn their cash, one of the major problems for turnaround professionals is that we are often called in too late. You would call the fire brigade if you saw a burning house. If you see a business that is fire fighting, it is time to call in the business fire brigade, a company doctor.

What causes business failure?

There are really four types of business failure. Firstly there is the start up that never does. It's a well known statistic that most businesses cease trading within their first three years. In many ways this is an inevitable result of the willingness of entrepreneurs to take the risk of starting up and testing the market. Given how difficult it can be to raise money in the UK for a new venture, many such businesses have so few resources to start out with that a relatively small set back in the early years can be sufficient to wipe them out, where a larger business would pull through. Having got through these critical first three years however, business failures then fall into three main camps. Catastrophic business failures where the business suddenly 'falls off a cliff' are the second type of failure. While often being high profile, these are actually quite rare and are often due to the impact of some traumatic event such as a major fraud, lost litigation or sudden change in the law. The third type of failure, overtrading, by contrast is a relatively common cause of business failure in boom times as businesses grow faster than their cash resources can support. But most failures are of the fourth type and follow what has come to be known as the business decline curve where a business that is underperforming, starts to become distressed and as the decline steepens, falls into crisis and eventual failure.