About Failing



What is Business Failure?
Business failure is when your business has reached the point where it is unable to continue without running into financial problems. The business has reached the point where it can no longer pay its bills and is therefore technically insolvent.

In actual fact the business has no way of meeting its obligations in the near future, and by continuing to operate puts it into further financial trouble.

At that point it could be best accepting that the business has not been successful and consider closing up.

Continuing to trade can deteriorate to a situation where you as owner become liable for all additional and continuing financial woes and more people who deal with you could lose their money.


Failure is Common
They say that well over 70% of businesses fail within the first 5 years. And over 50% of small businesses fail within the first 3 years, from the time the business is set up.

These statistics are disputed by some. Perhaps it may be more correct to say that over 70 % of businesses close within their first 5 years. These figures would then include those who have simply closed up for perfectly legitimate reasons.

There are many causes for business failure which affects not only new business start-ups but also businesses that have been around for some time who had run successfully in the past.

Business failure happens to businesses of all sizes, although the smaller businesses are exposed to bigger threats because they don't have the back up of extra capital or resources that some larger companies have access to. Smaller businesses also have more difficulty arranging funding assistance from banking and other financial institutions.

Business owners should look for and recognise when their business has reached the point where it can no longer continue to trade and do something about it before it's too late for the situation to be properly and legally resolved.


Failure and Economic Scarcity
No firm tries to be unsuccessful. Every business tries to satisfy their customers and their shareholders by making profits. If the business is unable to make profits it usually results in job losses and loss of money by investors in the business, and the suppliers of goods and services to the business.

Some economists see failure as an essential factor in economic progress. They see failure as a blessing in disguise. This is because it directs the economy away from wasteful and unproductive activities and moves it more to productive areas that result in prosperity.

Our policymakers who are interested in economic success through legislation believe that an economy without failure cannot progress. This is because of the doctrine of economic scarcity. Scarcity is basically an insufficient amount or supply; that is, it is a shortage.

Some say there is a limit to the amount that a society can produce and consume at any time; therefore people have to make choices. Scarcity forces the prices of commodities, such as labour and materials into such a high bracket that the less efficient producers fail eventually. This means that resources can then be allocated to produce goods and services that are in the greatest demand, causing production to move away from the goods and services that are in less demand.


Failures are Sometimes Inevitable - they usher in the New
The lack of capital for the success of all business ventures explains why some entrepreneurs fail and why some industries close up. The open market only rewards those whose discoveries or goods satisfy urgent demands. Consider Graham Bell with the telephone, or Henry Ford with the mass production of cars or Steve Jobs the founder of Apple Computers, or Bill Gates the creator of Microsoft.

If the invention is beneficial to society, that entrepreneur will be rewarded handsomely. However, the benefits that do not justify the cost in a free market will not attract consumers.

The bright side of any failure is that the capital and resources are reallocated for the production of other more in demand goods.