0264 · 1.3.4Why some businesses succeed and others fail

Success, failure and business finance

0:00A busy café can struggle to pay its bills, while a small repair shop can survive for years. Customers matter, but survival also depends on decisions, costs and access to money. Success comes from several conditions working together. By the end of this video, you will understand how those conditions support a business, and how weaknesses can cause failure. Business success means achieving the organisation’s objectives. Here, we focus on survival and the ability to operate profitably over time.

0:28Business failure occurs when an enterprise can no longer continue operating. The central challenge is to attract enough customers, manage resources effectively and have money available when payments become due. Revenue is the income a business receives from selling goods or services, while profit is total revenue minus total costs. Finally, cash is the money a business holds as notes and coins and in its bank account. A sale on credit adds to revenue before the customer actually pays, so these three measures can tell different stories.

0:57Think of each reason as the beginning of a chain. A decision or outside change affects customer purchases, operating costs or available cash. Those effects influence the business’s ability to continue. Explaining the chain makes a reason useful, because it shows how a particular situation leads towards success or failure. Management skills are the abilities needed to plan, organise and control business resources. Willow Repairs is a small bicycle workshop with an experienced owner.

1:23She estimates repair times accurately and checks upcoming payments. Realistic schedules help customers receive their bicycles when promised. Satisfied customers return, while careful planning keeps spending within the shop’s available money. Poor decisions weaken that same chain. An inexperienced repair-shop owner might promise more work than employees can complete and buy equipment the business rarely uses. A business plan is a document containing the business objectives and important details about the operations, finance and owners of the new business.

1:51Without a business plan, the owner has no realistic schedule or budget. Missed deadlines then lose customers, and unnecessary purchases leave less money for essential bills. Finance is money required for business activities. Enough finance allows Willow Repairs to purchase tools and cover payments while it builds a customer base. Cash flow is the cash coming into and going out of a business over a period of time. Its timing matters because rent and wages must be paid when due.

2:16A shortage of finance can prevent the shop from buying essential replacement parts. Repairs then remain unfinished, which delays customer payments and worsens the cash shortage. Interest is the payment made for borrowing money. Too much debt creates another risk, because loan repayments and interest must be paid in cash. A heavy debt burden therefore leaves less money for daily operations.

Products, demand and external conditions

2:37Suitability of the product concerns how well it meets customers’ needs. Cedar Café serves commuters who want portable breakfasts and quick service. Its convenient food suits the situation in which customers buy it. Reliable quality at an affordable price encourages repeat purchases and supports continued sales. An unsuitable product can struggle even when the owner works hard. If Cedar Café offers only large meals that take a long time to prepare, commuters may buy elsewhere.

3:02Kestrel Corner is an online shop selling phone accessories. Its out-of-date chargers fit few of the phones customers now own. Unsold inventory leaves money tied up in products that generate little revenue. Demand is the quantity customers are willing and able to buy at a given price over a period. Rising demand creates opportunities to sell more. Kestrel Corner could succeed when more people buy new phones and need matching accessories.

3:25Its suitable products then reach a growing group of potential buyers. Changing tastes can reduce demand for an existing product. Customers might switch to wireless headphones, while Kestrel Corner keeps a large inventory of wired ones. Fewer purchases reduce revenue, but the shop still has bills to pay. Product suitability is about meeting customer needs, while demand measures how much customers are willing and able to purchase. Changes in the economy affect the conditions surrounding many businesses.

3:50During economic growth, rising output and employment can increase household incomes. Cedar Café may gain customers who can afford more meals outside the home. Higher sales support survival when the extra revenue exceeds the additional costs of serving them. A recession is a period when a country’s output falls. Customers facing lower incomes or job insecurity may reduce spending at Cedar Café. Higher interest rates raise the cost of loans for businesses that have borrowed.

4:15Customers with loans also have less money left to spend. These pressures reduce the café’s cash, so the owner may need to cut spending or change the menu. Competition is rivalry between businesses seeking customers. Willow Repairs may benefit from having few nearby rivals because customers have fewer convenient alternatives. Reliable repairs and personal service can strengthen that position. However, limited competition supports success only when enough customers want the service and costs remain manageable.

4:43A strong new competitor can change those conditions quickly. Suppose a large café chain opens beside Cedar Café and offers faster service at lower prices. Some customers may move to the chain, which reduces Cedar Café’s revenue. If its costs remain high, the owner may struggle to pay bills and eventually close.

Profit, cash and business growth

5:01Consider Willow Repairs during one month. Total revenue is six thousand dollars, and total costs are forty-eight hundred dollars. Profit equals total revenue minus total costs. Six thousand dollars minus forty-eight hundred dollars gives twelve hundred dollars profit. Some customers bought on credit and will pay next month, so the shop currently has only nine hundred dollars in cash. Payments of fifteen hundred dollars are due today. Fifteen hundred dollars minus nine hundred dollars gives a shortfall of six hundred dollars.

5:28The business has earned profit, but it needs additional cash to meet today’s payments. The owner spots this gap before the payment date and asks customers for deposits on booked repairs. That money arrives before the bills are due, so the shortfall is covered. This illustrates how management skills and finance work together. Profit supports long-term survival, while available cash allows the business to meet immediate obligations. New businesses are especially vulnerable because their owners may have little experience and limited finance.

5:56Market research is the process of gathering, analysing and interpreting information about a market and its customers. With little research, an owner may choose a product or price that few customers want. Cedar Café could also struggle in a location with few passing customers, even with appealing food. Growing too quickly can create difficulties for an established business. Kestrel Corner might place larger inventory orders and recruit extra employees before receiving money from additional sales.

6:22The immediate payments can exceed available cash. Expansion succeeds when the business can finance those commitments and manage the larger operation effectively.

Explaining business failure in exams

6:31Keep the distinctions clear when explaining a case. Revenue measures sales income, profit accounts for costs, and cash meets payments. A popular product supports survival when its sales cover costs and receipts arrive in time. Strong management improves the business’s response to change, while external conditions still influence what it can achieve. An exam-style question could ask you to explain two reasons why Cedar Café might fail. The information says it serves commuters, provides slower service and faces a new lower-priced rival.

7:00Its rent remains unchanged. To explain, set out purposes or reasons, say why and how, supported with relevant evidence. Cedar Café’s slower service is unsuitable for commuters who need breakfast quickly. Lost purchases reduce revenue and make its rent harder to cover. The new rival’s lower prices could attract customers away from the café. Reduced sales leave less money available for continuing payments, which increases the risk of closure. In Paper One Short Answer and Data Response and Paper Two Case Study, use the stimulus information to build these connections.

7:31An identify question needs only the name of the relevant factor. To explain, set out purposes or reasons, say why and how, supported with relevant evidence. Justify means support a case with evidence or argument. Business success means achieving the organisation’s objectives. Management skills, finance, suitable products and sufficient demand help a business operate successfully. Economic changes and competition affect the conditions it faces. Trace each influence through customers, costs and cash to understand why survival becomes easier or harder.