Summary - Why business fails

Essay by dolphi_darren July 2004

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l Brief statement of understanding of the topic

It is a common sense in the business world that business fails at an exceedingly high rate. In discussing this topic, all researches give somewhat the same perspective: in the starting years, most business will fail. According to Frank (1988), over one-half of all business failures occur within the first years of a firm's star-up and approximately one-third of the failure occur within three years. Likewise, Nadu (1978) suggested "nearly two-thirds of new enterprises fail in the first five years". Given the high rate of the failure, we should clarify what business failure is before analysis against causes of failures occurring. Early in 1980, famous Dun & Bradstreet Corporation based on New York gave following pragmatic definition of business failure,

Business failure include those business that ceased operations following assignment for bankruptcy; ceased with loss to creditors after such actions as execution, foreclosure for attachment; voluntarily withdrew leaving unpaid obligations; were involved in court actions such as receivership, reorganization or arrangement; or voluntarily compromised with creditors.

Considerable numbers of academics in international business literature have been attracted by the term of business failure because "the business failure phenomenon is an important indicator of the economic health of business start-ups and growth of small firms". (Chen, J. H. and Williams, M., 1999). They summarize several reasons may cause the business failure. For example, Everett and Watson (1998) think that two primary causes leading to business failure are a lack of appropriate management skills and inadequate capital. While some external factors also have impact to ultimately determine the success or otherwise of business, such as high interest rates (Peterson et al., 1983; Hall and Young, 1991). Besides, some researchers regard the " management inadequacy" as main cause for business failure (e.g. Perry and Pendleton,