New businesses Essay

Consistent findings stick out imperatively indicated that the correlation between true entry and survival is negative. Out of every angiotensin-converting enzyme ampere-second new teleph bingle circuites introduced in the UK, 50 percent of them become obsolete before their third anniversary. Such high attrition levels argon not only sp be UK in alone but also in most modern economies and fundament be said to be a generic rule of buck. Just why is it that so many nascent substantials end up accomplishing little or nothing before they fin eithery become extinct?Is it that their owners do not put equal efforts into the communication channel development or be there other internal and external causes of this prevalent occurrence of duty loser? some theories have been put forth to explain the possible causes of the high rates of new vexation adversity. It is not surprising that major diagnoses of the root causes of depleted survival rate in new furrowes identify foretho ught inefficiency as one of the causes of the high attrition levels.Policy makers have also been blamed for recommending entrepreneurship as the solution to rejuvenating the economy yet little is done to educate people on what to expect amid globalization pressures, competition and technological changes that are possible to touch on the business survival. different theories put forward include the supportive environs thesis, nature of activity and industry theory. Firm survival can even be properly classified in three explanatory dimensions The firms specific characteristics Operational factors and the business cycle.This paper explores the characteristics of business failure nether these three dimensions and at the same time introduces a discussion on how entrepreneurs can enhance their businesss chances of survival by providing possible solutions to the small-scale levels of survival witnessed in infant businesses. II. Analysis a) Definitions Birth of the firm The introduct ion of a business marks the birth of a firm. This may actually swal pitiful when the idea of the business is borne. Consequent activities much(prenominal) as registering the company, acquiring premises and capital are secondary elements in the birth of a business.Survival of the firm Survival of the firm refers to its ability to withstand internal and external pressures to meet the objectives for which it was realised. Survival determines whether a firm makes it through its lifetime or whether it fails and consequently exits the market. destruction of the firm This denotes the final stage in a business at a point where nothing can be done to revive the business and the only solution is complete closure. Termination of the firm as a legal entity This style that the business is no longer recognized by the law.It means that a business in the context of the law is no longer operational and it is therefore not liable to debts, taxes among other liabilities to stakeholders. b) New Fi rms Survival writings New businesses in the UK have in the past shown high levels of business failures witnessed indoors the first three years of inception. According to Caliendo and Fossen (2009 154) at least cardinal out of every one hundred new businesses introduced did not make it to their third birthday.A study by the DTI Small worry Service from 1995 to 2004 reveals that these failures are actually vary with industries which could be attributed to the various conditions that exist in these sectors (DTI, 2007 13). On average, 82% of new businesses established survived the first year in business. Improvement has been record and by 2004, an average of 58% of new businesses survived the first three years all over all the sectors. Detailed survey results are shown in table 1 and 2. c) Why Half of Nascent Firms Fail The Survival Explanatory Dimensions1) Firm Specific Characteristics i)Managerial Organization Discernible management errors and high incidents of poor management e xceedingly contribute to the low survival rates of newly established firms. The death of many firms is mostly characterized by management which has turned out to be answerary. wasteful decision making and inadequate or non-existent planning will have contributed to the failure of the business in at least 30 percent of nascent firms (Phillips, 2004 68-70).Veronique and Wever (2000 138) note that managers inability to react to various forces affecting the business operations such as competition, technological advancements, economic trends and money issues could target to the ultimate downfall of a business. Inadequacy in management expertise is essentially attributable for the business failure to explore alternative financing options star to bankruptcy. ii)Inadequacy of Cash Reserves Inadequate financing comes in as a close second after poor management.New owners with little or no prior experience in business may fail to effectively predict cash flow. Miscalculation of amounts re quired to sustain the business before it picks up and underestimation of the costs associated with borrowing money are the major causes of pecuniary strain (Lane and Schary, 1991 101-103). Exhaustion of cash reserves is also likely to be influenced by poor pricing, over-investment in fixed assets and uncontrolled growth. Uncontrolled growth occurs when the owners want to take up every hazard that comes so that at the end of it all they cannot satisfy all their customers.In this case, firms end up borrowing large amounts to meet the high demand and when the loans cannot be paid effectively, what results is collapse of the firm (Audretsch and Keilbach, 2004 423). Other causes include over dependence on a few customers, fraud and uncontrolled drawings by the owner. iii)Poor debt management and Over-borrowing This is closely associated with cash inadequacy and it results where managers are ill-equipped in financial management. Small business owners are likely to obtain the wrong type of financing and worse still take more than the business can afford to pay (Jostarndt, 2007 139).This may lead to borrowing loans to clear existing ones which is not a good debt management strategy. Inability to pay debts on time and lack of coordination between incoming cash and outgoing cash may lead to the business finally going bankrupt and consequently create its death. iv)Ownership Status There are two ship canal of looking at this perspective the legal ownership and the reasons for starting the business. A sole proprietorship business is more likely to fail callable to financial and management problems than a partnership or a limited company. The reasons for starting the business can exceedingly influence a firms survival.Moore and Gooderl (2008 8-10) name two types of entrepreneurs the opportunity entrepreneur and the necessity entrepreneur. The former establishes a business to exploit available business opportunity while the latter may start up a business for the purpose of sustaining himself probably if he cannot find a job. According to Moore and Gooderl (2008 16-17) the opportunity entrepreneur is likely to succeed while the necessity entrepreneur may not exert enough efforts towards the business. The increased number of necessity entrepreneurs in the UK has super increased the failure levels in new businesses.v)Personal Characteristics of the owner This mostly has to do with the attitude of the owner and the manner in which he or she applies these in the business context. Owners make a mistake of taking up all responsibilities without making use of delegation to junior employees as a result of fearing that they may not do it perfectly. Jensen (1976 335) describes this as the challenge of letting go. Owners normally find themselves exhausted from overwork and yet do not find time to share important issues facing the business. Use of business funds by the owner can also cause detrimental effects on the business.Personal attitudes such as aggres siveness and lack of concern for the employees may cause high rate of employee turnover as well as keep away customers (Daily et al, 2002 398-343). vi)Innovation and reaction to technological changes The world is advancing at a high rate and technology is one of the areas that a business needs to keep up with. Many new businesses fail due to being left behind in technological advancements such that they are overtaken by their competitors who take with them all the customers (Agarwal, 1996 103-106).Innovation is one of the major tools for a successful business and this is one area that new businesses have not been able to address mainly due to lack of enough capital to come up with new products and services. viii)Poor knowledge of the market Most business owners enter the market with little knowledge about what to expect. Failing to deal out market feasibility studies limit the owners knowledge on the competitors in the market and their influence the customers characteristics and be haviour and various market fluctuations they are likely to encounter (Covin et al, 2000 199-206).2) Operational factors i) Competition New businesses are often overwhelmed by the efforts required to counter competition from already existing firms. This is considering that these firms have already established their customer base and winning loyal customers could prove quite a challenging task for new businesses. Usually, dominant competitors may even device ways of putting new entrants out of business such as lowering prices and offering discounts (Covin et al, 2000 200). Their aim is to push the new competitors until they cannot keep up with the situation such that they eventually quit.ii) Location The location of a business is a major determinant for its survival. New businesses in rural areas are likely to fail due to limited local markets and isolation. On the other hand high costs, presence of large firms and regulatory barriers pose challenges to businesses located in the urban areas (Sutaria and Donald, 2004 250-253). 3)Changes in Business Cycle i)Macroeconomic growth and economic pressures New businesses are usually unable to handle economic shocks that may result from high interest rates, fluctuations in commuting rates and general inflation.According to David and Mahmood (1995 89-93) not many businesses survive an economic surge or a recessionary period which may lead to skyrocketing of interpret prices and high costs of borrowing. ii)Entering Cohorts exit rate Cohorts refer to groups with similar characteristics. The result of exit of similar businesses can either have a positive or negative effect on a new business. Exit may mean less competition which is an advantage. New firms however rely on one another for inspiration.A person operating a business where everyone is quitting due to one reason or another is bound to get disillusioned and have the attitude that his business may fail too (Phillips, 2004 69-71). iii)Changes in legal environment Whe n the laws of a country change, new businesses are likely to suffer since they are not yet stable enough to cushion themselves from such changes. Amendment of tax laws and business requirements may cause a new business to go bankrupt. d) change magnitude Survival Chances Strategies to increase the chances of survival for a business entail addressing the leading causes of failure.The most fundamental requirement is the improvement of the management capabilities. When there is good management in a firm, other factors will follow suit because every operation of the business is determined by the management (Sutaria and Donald, 2004 253-255). Improvement of communication within the business and proper sharing of duties are skills that the owners of the business need to acquire. This can be done through attending management and entrepreneurial seminars and conferences so as to learn secrets of firm survival from professionals. Proper planning is the ideal solution to financial problems.V eronique and Wever, 2000 139-141) refers adequate anticipation of cash flow as the secret to overcoming financial problems for starters. This could be done through the help of an expert if the owner is not in a position to do so. Finding alternative sources of finance apart(predicate) from the usual ones is key in preventing the collapse of a business due to lack of funds. There are many available sources of finance including bank loans, attribute card advances, sale of assets among others (Moore and Gooderl, 2008 298-299). Care should then be taken to make sure the finances are properly utilized.The firm should avoid relying on a few customers because huge losses can be felt if the customers suddenly withdraw. Instead, they should aim at a large customer base. Over-borrowing can be trim down through making proper cash forecasts and using the limited resources that the business has. In essence, the firm can adopt a steady growth over time instead of rushing to expand at once (Dai ly et al, 2002 399-401). Finally, the management should be keen in managing the debts of the business keenly balancing the income and expenditure so as to cover all liabilities and debts in time.A business moldiness clearly identify its customers and establish whether they can sustain the business effectively considering the level of competition. This can be done prior to the business establishment through a market feasibility studies while answering the following questions How many competitors are in the area you plan to establish your business? Who will be the businesss customers and what are their buying habits? What is the level of loyalty of these potential customers to the present-day(prenominal) suppliers? Are they likely to buy your product? Is the product seasonal? Is it possible to make profit out of the business?Once these questions are answered, the likelihood of failure can be minimized as specific strategies to address the issues can be formulated (Audretsch and Thuri k, 2007 113-141). Business owners must realize that they cannot do everything by themselves. Employers can delegate and allow employees to make certain decisions. Consequently, owners will have ample time to concentrate on more important business issues such as finding new customers, getting more funds for the business as well as solving the current issues facing the business (Daily et al, 2002 403-405).The need for long planning is inevitable. This involves planning for growth and transition in the future. It also involves planning for uncertainties such as loss of employees, customers and suppliers. In the wake of the high global business deal advancement and changes in the market, businesses should always be alert to avoid being taken unaware by advancements in technology, innovation and changes in customer preferences and cultivation (Zoltan, 1988 321). Legal changes and changes in tax systems should be catered for in the long-term business plan.The state of the economy is bou nd to change from time to time which is why firms must anticipate for any future economic shocks through investing in stocks, futures, options among others. Insurance is also an option for more larger firms. III. Conclusion No environment can be said to specifically favour new firms in all angles hence the need for those starting new firms to be overly cautious. Firms are most definitely exposed to numerous risks that may lead to their extinction as indicated in this discussion.Management is identified as the root cause of low survival rates among nascent firms and its improvement could work to solve the predicament presently being witnessed in new firm survival. Proper balancing of the firms cash reserves being generally alert to any changes in the business environment making informed decisions to deal with these changes coupled with minute management practices is exactly what is needed to save young firms from their predicament and promote their longevity.