Why a Business can fail during the Early Stages of Operation? (Other (Not Listed) Sample)

WHY A BUSINESS CAN FAIL DURING THE EARLY STAGES OF OPERATION?
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Why a Business can fail during the Early Stages of Operation?
Introduction
Every business establishment, either big or small is naturally defined by two diverse perspectives i.e. failure and success. Indeed, these terms are often used interchangeably, but in this paper, a negative perspective (failure) is chosen for the review of the causes or the reasons for failure of businesses at early stages. The concept of failure has received a number of definitions already, and is commonly defined either as the ownership discontinuance of a company or as the discontinuance of the enterprise itself (Everett and Watson, 1998). Above all, the concept of failure of an enterprise is elaborately defined within the context of the studied firm’s characteristics. Nonetheless, even though terms like bankruptcy can sometimes be used to describe the failure, a business that stop either operating due to withdrawal or acquisition without any liability is not apparently classified as failed. The criteria to classify an organization as either failure or successful is sometimes predicted by Banks, credit managers, and venture capitalists (Carter and Evans, 2006). Perhaps, one theory that better describes why most businesses are likely to fail is the complexity theory, for it provides a new perspective from which new businesses should be observed. The theory illustrates that the current growth of start-ups is undeniably a chaotic process, entirely distinct from the traditional methods (Tsai and Lan, 2006).
Young businesses are prevalently prone to failure in the UK, and the rate is evidently high. As established by the UK department of industry and trade, failure amongst these emergent businesses underneath the VAT threshold is predominantly high (Financialpreneur.com, n.d.). Many studies have been done to unearth the reasons for business failure especially at early stages in the UK, with small and medium enterprises in particular. The motivation for these studies as stated by Abdel Samad, is the fact that, even though the failures can never be entirely eliminated in an enterprise environment, the failure can be reduced if the underlying causes are detected early and action invoked (Everett and Watson, 1998). Conventionally, these factors causing failures are extensive and often divided two, the external and internal reasons. The external include the government intervention, support groups i.e. venture capitalists, business location, and competitor underestimation whereas internal factors include poor planning, underfunding constraints, poor financial management competence, and inadequate market research. In this paper, I will connote the above reasons why businesses are likely to fail during early stages. Poor start-up planning
Planning is one of the essential steps for successes of business, and devoid of appropriate planning only means an inevitable failure. Planning entails a well-crafted business plan which encompasses all essentials for successive business establishment. Essentially, a business plan should serve as a framework to illustrate the vision of the start-up, and also convening the subordinate to facilitate the attainment of the vision. This simply means it is as important as the idea or business concept itself and therefore should be number one priority before operating any business. Research has often indicated such poor planning as the being responsible for most companies to fail. For instance, a research by Derek and Doug established that entrepreneurs who do not have a progressive or succession plan identify the foremost barrier to business progress (UK essays, 2013). Such entrepreneurs might put all their efforts in turning a small enterprise into bigger corporation in vain unless they have a workable business plan (UK essays, 2013). The primary excuse given by most entrepreneurs is that, it is too early to plan, but over time they have been proved wrong.
According to Derek and Doug, the established that most businesses specialized advisers pointed out that it was never too early to draw a plan (UK essays, 2013).. However, research by Tsai and Lan on the complexity theory perspective about the development of start-up businesses proposes an alternative. They established that since entrepreneurs cannot easily predict the materialization of a new order, it is hard for them to institute advance plans, but instead, they can rely on company’s vision as a framework of their actions and sustain elasticity with regard to future growth (Tsai and Lan, 2006). Poor planning is also evident in the in finances and expenditures, and it always a challenge considering the meagre budget that an entrepreneur is faced with at launching. Therefore, if not managed correctly and allocated, one department may face a deficit and cause the whole business to falter.
Under funding of a business
This factor is related to planning and is another recurrent mistake that most small businesses make, by just underestimating the finances necessary for the company’s launching. Most start-ups today fall short within the first few months after establishment because either they run out of money or their anticipation to obtain credit from banks fails (Walker, 2004). This is ultimately a consequence of poor planning. A well-considered business plan will acquaint an entrepreneur with the exact amount of money required for business expenditures and how to run the company until a positive cash flow is attained (Pendrith, 2014). Lack of development of cash flow and income statements at least within the two years of business operation further heightens the chances of business failure. These are remarkable creations, as they will serve to tell if the firm has adequate funds to uphold the company till it attains the profitability (Pendrith, 2014). As held by the US department of Commerce, small business fails because they do not use the available financial information suitably. Some entrepreneurs have no cash and the only expectation is that the bank will come to their aid, and often the bag their expectation that banks will fund them based on their good innovations (UK essays, 2013). Unfortunately in most instances, banks do not buy such ideas for they consider such owners as a reflection of the inability to manage money particularly if they have no cash.
Poor Financial Management Skills
In line with financial management, one theory that concurs very well with the current state of start-ups is the complexity theory, whose perspective sustains that young businesses are dissipative constructions, and are for that reason always difficulty at attaining equilibrium (Tsai and Lan, 2006). From this understanding, financial administration becomes a vital aspect of business growth that does not only need a one-time consideration, but rather a progressive management. According to Stefan deficiency of management skills results in inadequate operational capital and other financial constraints, a major reason why business do not survive at early stages (UK essays, 2013). Consequently, as held by Mark Friedman, Real Time Strategy founder, businesses are possibly going to fail if they do not monitor the progress of the working capital in terms of accounts payable, accounts receivables, and cash at hand (UK essays, 2013).
He further acknowledges that a liquidity crisis is inevitable when business operations are going well together with cash flowing, because new business managers have a propensity of not preparing the next round success. This is simply what the complexity theory envisages; the progressive growth of start-ups is a chaotic process that demands continual fitness (Tsai and Lan, 2006). Therefore, the monitoring especially of cash flow is very paramount. As remarked in the Barclays Bank’s report on the challenges UK small businesses face, cash flow is a critical measure of a firm’s capacity to sustain adequate financing to pay for its current liabilities (Barclays bank). An entrepreneur, therefore, ought to manage the finances by developing an ample budget each time before investing in any asset or liability. Consequently, stabilisation of the cash flow will deter wastefulness and promote effective investing.
Despite most start up owners believing that money is the main necessity to a run a business, inadequacy of entrepreneurial skills has become one of the most notable cited reasons why small businesses fail. According to Paphitis, the retail magnate and a passionate advocate for entrepreneurial education, the reasons as to why most small businesses falter is because the entrepreneurs have not done research, do not know who to fund them, and general not doing their homework (Burke, 2014). Paphitis draws a comparison between academic and entrepreneurial education and states that they are not different. He further holds that the United Kingdom start-ups’ fail rate will drop if entrepreneurship in incorporated in the schools’ curriculum from age eleven (Burke, 2014). Elsewhere, Dun’s research reveals that 90% of entire business failures and shortcomings are the result of owner’s low level of managerial expedience (UK essays, 2013).
What this illustrates is that even though the owner of a business is an excellent salesperson, he may lack the proficiency to handle the apparently routine day-to-day operations to keep the company running. Business owner being deficient in of the entrepreneurial dexterity would possibly cause business to fail, particularly during the early phases of a new corporation. However, the performance start-up companies rely on a number of variables such as the owner behaviours, owner character, and ecological influence. As stated by Charles and Frank, the potential businessperson has the capacity to control, direct, or r...