Why Do Businesses Fail?
“Bankruptcy is the situation where the firm’s liabilities exceed the economic value of its assets.”, according to Altman:17 (2007). Nowadays there are lots of companies facing financial problems and ending up with bankruptcy. The business failure can be caused by many reasons however the main factor is from internal problems. From my point of view, firms collapsed because the management team did not exercise control efficiently of the business operations. Those poor management can be categorized into three equally important factors which are human resource management, marketing management, and financial management.
Firstly, the company gave employees too many benefits, especially wages. This could not only increase the cost of product, but also decrease company’s profit. According to Gaebler Ventures (2010), it claimed that labour cost is one of the highest expenditures of company, particularly new businesses. Bloomberg (2010) pointed out that an increase in labour cost can slow down the organizational growth. If the company provides workers too high wages but does not increase working hours, the product cost will rise and the company itself will gain lower profit. Not only does company give workers higher salary, but fringe benefits, such as healthcare, insurance, retirement benefits and many others, also cause decrease in revenue. For example, Thai Post (2009) claimed that Thai Airways International made a loss on their revenue because of providing employees too many benefits such as free ticket for senior employees’ parents and free first class ticket for the company’s board of directors. Due to the profit they were supposed to gain from selling the ticket, the Thai Airways International made a loss instead. Apart from giving too many benefits, some companies have done mistakes in the recruitment and selection process. It means that they did not hire a right person for a particular job. If that employee has no skill, his or her potential would not be
Firstly, the company gave employees too many benefits, especially wages. This could not only increase the cost of product, but also decrease company’s profit. According to Gaebler Ventures (2010), it claimed that labour cost is one of the highest expenditures of company, particularly new businesses. Bloomberg (2010) pointed out that an increase in labour cost can slow down the organizational growth. If the company provides workers too high wages but does not increase working hours, the product cost will rise and the company itself will gain lower profit. Not only does company give workers higher salary, but fringe benefits, such as healthcare, insurance, retirement benefits and many others, also cause decrease in revenue. For example, Thai Post (2009) claimed that Thai Airways International made a loss on their revenue because of providing employees too many benefits such as free ticket for senior employees’ parents and free first class ticket for the company’s board of directors. Due to the profit they were supposed to gain from selling the ticket, the Thai Airways International made a loss instead. Apart from giving too many benefits, some companies have done mistakes in the recruitment and selection process. It means that they did not hire a right person for a particular job. If that employee has no skill, his or her potential would not be
References: Altman I. E. 2007. Why Businesses Fail. Retrieved on September 6th, 2010 from http://www.emeraldinsight.com/journals.htm?articleid=1706110&show=pdf Bradley B. D. and Cowdery C. (n.d.). Small Business: Causes of Bankruptcy. Retrieved on September 6th, 2010 from http://www.sbaer.uca.edu/research/asbe/2004_fall/16.pdf Gaebler Ventures. 2010. Why Businesses Fail. Retrieved on September 5th, 2010 from http://www.gaebler.com/Why-Businesses-Fail.htm Guardian. 2010. Connaught appoints administrators after failing to secure new funding. Retrieved on September 7th, 2010 from http://www.guardian.co.uk/business/2010/sep/07/connaught-on-brink-of-administration Jickling M. and Raab A. A. 2006. Hedge Fund Failures. Retrieved on September 6th, 2010 from http://www.policyarchive.org/handle/10207/bitstreams/3026.pdf Olsen L. L. and Andreassen W. T. 2009. Poor Customer Service Leads to Loss of Customers. Retrieved on September 7th, 2010 from http://www.alphagalileo.org/ViewItem.aspx?ItemId=56467&CultureCode=en Thai Post. (2009). “Cause of Thai Airways International’s Failure”. Retrieved on September 10th, 2010 from http://www.thaipost.net/news/010309/1060 Thornhill S. and Amit R. 2003. Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View. Organization Science 4 (5) 500 Vinturella B