Small Business Failure

Small business suffers from high failure risk.Failure implies closing down of small business due to financial loss.It results from inability to succeed in running a business.Things don't work out as planned.

        Types of failure are as follows:-

• Formal failure:It ends up in court with declaration of bankruptcy.It involves loss to creditors.
• Informal failure:It is business termination.The owner voluntarily terminates the business.It is discontinuance of operations.The owner packs up and closes the door of business.Creditors are not the losers.The owner absorbs the loss.It is also called personal failure.The causes can be retirement of owner or his lack of interest in business or neglect or loss of market or change in the form of ownership.     

         Symptoms of failure that lead small business towards failure are:-                                                                                     

• Declining profits-The business goes on incurring loss every year.The amount of accumulated loss keeps on increasing.The reasons for declining profits can be increasing costs.The costs of raw materials, labour, overheads may increase due to inflation, shortages and other reasons. 
• Declining sales-Sales may keep declining.The reasons can be competition it attracts the customers of the business.The needs and preferences of customers may change through the new products in markets so this reduces sales.
• Lack of working capital-The working capital can be inadequate.This reduces liquidity.The reasons may be continuing losses,overdue receivables,high debt servicing in terms of principal and interest,unrealizable inventory of obsolete goods etc.
• High debt burden-The debt can be excessive in capital structure.It may require heavy interest payments.
• Inadequate management-The owner may put in too little time and effort in the business.He may not emotional attachment to business.