Factors Contributing to Decline

Undercapitalisation:

Not starting with enough capital is a major cause of business failure. 

During the establishment phase (which can be years), firms experience negative cash flow and losses. This means that if the business does not have enough capital to keep the business afloat, it will decline.

Without enough cash, the business will be unable to purchase inventory, pay employees and other expenses. 

This will lead to a quick and premature business failure.

Poor Cash Flow:

Cash is the lifeblood of business. Only as long as a business has liquid cash to flexibly operate the business can it survive.

Continued losses (negative cash flow) will result in either continued investments made to prop up the business, or business failure. 

Poor cash flow can also be caused by allowing credit sales to customers that fail to actually pay (Accounts Receivable).

Cash flow can be tight during expansion / growth as cash is poured into long-term assets to generate more sales revenue and profits.

Lack of Management Expertise:

Many businesses fail due to poor management. 

Bad decision-making, poor research, a lack of planning, an inability to follow through and lead others, a lack of creative imagination, poor financial accounting—these are common factors leading to business decline.

Businesses can decrease their chances of failure by ensuring that owners / managers have the skills and knowledge to make sound decisions when operating the firm.