Reasons Why New Businesses Fail
New businesses commonly fail because of poor cash-flow management, insufficient market research, under-capitalisation (not enough start-up finance), a poor location, strong competition, or a lack of relevant management skills and experience.
Before you start
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Method
- Learn the main reasons new businesses fail: poor cash-flow management, insufficient market research, under-capitalisation, poor location, strong competition, and a lack of relevant management skills or experience.
- Learn to sort causes into internal, within the entrepreneur's control, e.g. poor planning or cash-flow management, and external, outside their control, e.g. a rise in interest rates or a new competitor opening nearby.
- Learn why cash-flow problems can sink even a profitable business: it can be profitable on paper but still run out of cash to pay bills if money owed to it is not collected in time.
- For state or identify questions, name the cause of failure directly from the case.
- For explain questions, name the cause and link it to the specific mechanism by which it leads to closure, for example why running out of cash, not lack of profit, forces closure.
- For evaluate questions on which cause was most significant, weigh at least two causes against each other and reach a judgement that refers to details in the case.
Worked example
A new furniture shop closed after 14 months. It had a loyal base of customers and was making a profit on each item sold, but it regularly let customers pay in instalments over three months, while its own suppliers had to be paid within 30 days. Explain why this business failed despite being profitable.
- Identify the profit position: the shop was making a profit on each sale, so profit itself was not the problem.
- Identify the cash-flow mismatch: customers were allowed three months to pay, but suppliers had to be paid within 30 days.
- Link this to the shop's cash position: money was going out to suppliers faster than it was coming in from customers, so cash in the bank could run low even while sales were profitable on paper.
- Write the explained conclusion: the business likely failed due to poor cash-flow management, not a lack of profit, because the mismatch between slow customer payments and fast supplier payments meant it could run out of cash to pay its bills, forcing it to close.
Practice questions
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Q1State one internal cause of new business failure.Show answer
Answer: For example, poor cash-flow management, insufficient market research, or a lack of management skills.
Q2State one external cause of new business failure.Show answer
Answer: For example, a new competitor opening nearby, or a downturn in the economy.
Q3Identify the term for a business having too little start-up finance to survive its early months.Show answer
Answer: Under-capitalisation.
Q4Explain why a profitable business can still fail.Show answer
Answer: Because it can run out of cash if money owed to it is collected too slowly compared with when it must pay its own bills, even though it is making a profit on paper.
Q5Give one reason poor market research increases the risk of a new business failing.Show answer
Answer: Without it, the entrepreneur may launch a product few customers actually want, leading to low sales.
Q6State one action a new business owner could take to reduce the risk of cash-flow problems.Show answer
Answer: For example, producing a cash-flow forecast, or agreeing shorter payment terms with customers.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Explain two internal reasons why a new business might fail.
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A cafe opened on a quiet side street away from the town centre, choosing the site because rent was low. Six months later, a large chain coffee shop opened on the main high street two minutes' walk away, offering longer opening hours. The cafe closed after 10 months, having consistently sold fewer cups of coffee each month than its own cash-flow forecast predicted it would need to break even. Evaluate the most significant reason for the cafe's failure.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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