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You are here: Home > Educators > Level 2 Business and Economics Education > Business Success |
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What is Business Failure?You might think that a successful business is one that makes a profit. In the last resource in this series, that was one of the factors that might help us to judge the success of a business. However, the amount of profit made is also important. Let us take an example of a small business - your local butcher, for example. In 2002, our small business made a profit of £30,000. In 2003, the profit came in at £12,000. Does this mean that s/he is failing? What would your response be now if we told you that in 2004 they made a loss of 3,000? Would this mean that they had 'gone bust'? This type of movement in profit levels is typical of many businesses. Some years are much better than others: there might be particular reasons for the dip in profits and it would be difficult to make any judgement about the business until we knew more about the background to the reasons. We need to think carefully about what we mean by profit. There is a good deal of confusion over this term. Many students confuse profit with revenue, price with costs and regularly refer to 'making money' without being more precise on what this actually means. A dip in profits could be explained by the firm having higher costs for a short period of time - perhaps because they have decided to extend the shop, maybe the costs of buying raw materials have increased or it could be due to a slump in sales. Making sure that we understand what these figures mean is an important part of building our understanding of business failure. Business failure is not just a case of making a loss - many firms make a loss but do not 'go bust'. So business failure must be something more than making a loss. TaskIn groups of no more than three or four, discuss the meaning of or difference between the following terms:
Once you have finalised your discussions, write down on a large sheet of paper your responses. Put them up around the room and then visit the other posters in the room - how far do they all agree on the meaning of these terms? Losses and Going BustMany businesses, as we have said, can make a loss but do not go bust. The difference between the two is that a loss might be sustainable for a short period of time - possibly a year or more in larger businesses - but ultimately a firm cannot continue to carry on in this way. It must cover its costs through the revenue it generates. 
Business closure is not just a case of a business making a loss - we need to make sure we understand some of the terms used to see when a business can survive and when it cannot. Copyright: Tamlyn Rhodes, from stock.xchng. Many firms struggle to survive because they are unable to pay their debts. To carry out business the firm must generate enough revenue to be able to pay for the raw materials, rent, electricity, telephone and salaries and so on. For some businesses the money coming in does not coincide with the need to make payments. If the business does not have the money to pay for these debts then they are said to be insolvent. That is when they have 'gone bust'. It could be a case that the business is owed money but is still forced into closing down. In this situation it is likely that the people who are owed money are unwilling to wait any longer and have gone to the courts to try and get their money - by this time it is too late for the business. TaskThe two links give some details about losses made by two well-known businesses.
Look at theses sources and answer the following questions.
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