Business failure — Edexcel A-Level Business
Test yourself on Business failure with PEARSON EDEXCEL A-Level practice questions.
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Business failure explained
Collapse is rarely one thing; it is usually a weakness inside the firm meeting a shock outside it that a stronger rival absorbs.
Read the full explanation
From within, the money based reasons are running out of cash while still trading profitably, overtrading during rapid growth, borrowing so heavily that interest swallows operating profit, and planning from hopeful forecasts. The other internal reasons are people and markets: no answer to a new competitor, quality or service slipping, key staff leaving, or refusing to change a model that has stopped working, which is broadly the Blockbuster story as streaming arrived. From outside come recession, interest rate rises, a shift in taste, a new entrant, exchange rate movement and new regulation. The judgement worth marks is which reason was decisive and whether it could have been foreseen.
Your focus
- a) Internal and external causes of business failure: financial factors; non-financial factors
Business failure exam tips
Marking Points
- A clear split between reasons the managers chose and reasons they only reacted to, with at least one money based and one people based example on each side.
- Mechanism rather than label: explain how heavy borrowing does the damage, namely that interest must be paid whether or not sales hold up.
- Application to the case with evidence from the extract, such as a falling current ratio, a lost major contract or a collapse in market share.
- A ranked judgement supported by a stated criterion, for example that the external shock was survivable while the cash management was not.
Examiner Tips
- 💡This is prime twenty mark evaluation territory, so plan two reasons in depth with a criterion for deciding which mattered most.
- 💡Markers reward a counterfactual: say what the business could have done differently and whether that was realistic given its resources.
- 💡Use the financial data in the extract as evidence of a reason rather than describing the numbers for their own sake.
Common Mistakes
- Listing reasons with no link to the named firm's evidence, which leaves the answer generic and short of application marks.
- Treating a recession as an automatic explanation, when competitors in the same market came through it intact.
- Confusing insolvency with trading at a loss, and so missing the cash flow explanation completely.