Business failure and the mortgage meltdown

Business Failure

All businesses are started with the intention of success, although this intention alone cannot guarantee immunity from failure. Whether or not businesses experience success or failure depends on several factors. Some of these factors are in the control of the business owners themselves, such as quality of management, while some factors are out of the control of the business owners, such as current economic climate. The following discussion highlights factors involved in why businesses succeed or fail, and how certain factors such as sex of the business owner or location of the business play into the equation.

Ravindran (2008) described how studies have demonstrated that approximately 50% of small businesses experience failure within their first four years of existence. This failure is most often a result of lack of knowledge regarding proper workings of businesses and poor management (Ravindran, 2008). Another crucial factor involved in the failure of businesses is the absence of any sort of relevant market. This means that individuals start businesses without initially understanding the need for demand for the business they are offering (Ravindran, 2008). The rampant failure of small businesses within a short period of time provides a learning opportunity to other business owners as to what to do and what not to do in order to promote business success. Ravindran (2008) explains how business owners can study the problems that led to the demise of failed businesses in order to increase likelihood of success rather than failure. Furthermore, meticulous planning, clarity in vision, and proper management are key factors involved in the avoidance of business failure (Ravindran, 2008).

One of the most crucial components to a successful business is the presence of a business plan (Ravindran, 2008). A good business plan provides evidence of a well-conceived idea, and prevents unnecessary stumbling over obstacles that can be prevented through careful planning (Ravindran, 2008). A business plan provides the business owner with a useful guide to refer to when the going gets tough, and it allows the business owner the opportunity to thoroughly investigate and analyze every aspect of their business and market (Ravindran, 2008). According to Ravindran (2008), the most important elements involved in the development of a good business plan include recognition of the niche the business will fill, the unique components of the business that are not offered by competitors, the legal structure taken by the business, sources of financing and capital for the business, management strategies for the business, costs of operating the business month to month, marketing plans for the business, and expectations regarding profit.

Financial knowledge and understanding is crucial to the success of any business. When this understanding is flawed, business owners often incorrectly underestimate the amount of money required to start up and run their business (Ravindran, 2008). Also, another common error is overestimating timeframes involved in the generation of profit as well as factors out of the control of the business owner, such as a suffering economic climate (Ravindran, 2008). Ravindran (2008) described how business owners should have an estimation of how the breakeven will be achieved in regards to sales within different timeframes, and that studies demonstrated that it generally takes businesses three years to break even and five years to turn a profit. Furthermore, success in business requires business owners to calculate the amount of funds needed for the timeframe required for the business to show profit (Ravindran, 2008). Other factors commonly involved in business failures include poor capital structure, overexpansion, overspending, economic timing, poor internal controls and execution (Ravindran, 2008). It is of the utmost importance that clear protocols be established in regards to how tasks in the business need to be accomplished (Ravindran, 2008).

How do factors such as the sex of the business owner and the geographic location of a business influence failure rates? Robinson (2007) sought to provide insight into the difference between men's and women's business failure rates. In particular, this researcher compared the business discontinuation rates between men and women and looked at the proportion of businesses that were terminated because of bankruptcy. IT was also investigated whether the business failure rates were in any way associated with the location of the business, either urban or rural.