Business Failures Reasons for Failure

Business failures have become a properly investigated field of study in the past few years as a struggling economy and an overall difficult business environment have combined to discourage potential entrepreneurs from entering the market place and to cause many existing business owners / entrepreneurs from continuing their endeavors. This interest in business failures is precipitated by the fact that the number and nature of business failures impacts negatively on the overall business climate and examining possible causes in an effort to forestall further such failures is vital to maintaining a healthy business environment. The emphasis in recent years has shifted from examining why and how businesses fail toward an analysis of how to avoid and prevent business failures.

The failed business that I chose to review was a small ice cream / restaurant in my neighborhood. The name of the business was Charlie's Ice Cream and Edibles. Located in a strip center along one of the major streets running through the center of town it appeared to be strategically located to attract good traffic both from the passing of automobiles and walk-up business from the surrounding neighborhood. The strip center was well-maintained and attractive and there was no noticeable problem with loitering or nearby business that might draw customers that might cast negatively on the ice cream or restaurant industry. The proprietor himself was a friendly, out-going personality that was well-liked and respected. The business was within easy walking distance from the area's largest recreational facility. This facility had a large Olympic sized outside swimming pool, inside handball and basketball courts, and a large workout facility supported by a number of year-round exercise programs. In addition, there were several school located nearby. Unfortunately, however, the central business district was several miles away and, although there were several smaller office buildings nearby, there were no large businesses of factories nearby. Based on the demographics of the surrounding area, Charlie, the proprietor was relying upon doing a heavy business during the warm months when the nearby swimming facility was open and hope that profits earned during those months would hold him over during the sparser winter months.

For the first two years Charlie's theory of capitalizing on the profits of the summer months to sustain the business during the slower winter months worked quite well. During the months when the pool was open his small store was filled to capacity nearly every day. Customers would be lined out the door to buy his homemade ice cream and old-fashion style hamburgers. It quickly became a local gathering spot for families and, despite the huge drop-off in business from November to early May, his business flourished. He had expanded his space twice and added items to the menu in an effort to increase business. The future looked bright for Charlie as his business seemed to be establishing a foothold in the community. He began to become active in the activities of the local school system donating both his time and product to various causes and there were no apparent signs that the business was anything but successful and that it should remain so for a number of years. The neighborhood surrounding the business remained solid and was marked by some minor growth in regard to some smaller office buildings being added and the addition of a bank and coffee shop nearby. Unfortunately, toward the end of the third year of Charlie's business some downward trends were noted and the business began to struggle. It struggled to the point that making until the summer months became a reality and in the middle of February Charlie determined that he could no longer afford to keep the doors open and the business was suddenly forced to close to the shock of the entire community.

II. Reasons for Failure

The reasons why Charlie's business failed are not immediately obvious (U.S. Small Business Administration). He had chosen his location wisely and done an excellent job of maintaining a clean, professional operation. His product was well received and was unique for the area. Within close proximity of his location there was initially no competition for his business. There were a number of fast food options but there was no business that could combine good product with personalized service plus, there was no one within walking distance of the community's number one warm weather attraction: the swimming pool. Charlie was careful...

He had never had a problem with teenagers loitering or a harassing element bothering his customers. Most importantly, success had never caused Charlie to lose sight of his dream of operating a successful business or cause him to stop working as hard as he ever did. From the day that the business opened until the day that it ultimately closed, Charlie worked in the building every single day.
For Charlie, the biggest problem was a struggling economy and competition from a national chain that eventually caused him to lose his strangle-hold on his market. Two conditions that are often at the core of business failure but two conditions over which Charlie had little or no control. As to the economy, Charlie suffered in two ways. First, his primary product was ice cream. Although he served other products such as sandwiches, soups, and salads his number one product remained ice cream and it was the once product that gave his restaurant its uniqueness. Ice cream, however, is not a necessity on the family menu particularly high-priced, home-made varieties. In struggling economic times, young families stop purchasing ice cream from small shops and begin buying cheaper varieties from grocery stores. Concurrently, in struggling economies membership at swimming facilities suffer as well. Fewer members at the health facility translated into fewer ice cream customers and this combination of factors resulted in reduced profits. Subsequently, this meant less a reserve and the winter of Charlie's third year was therefore a real test of his ability to persevere.

If the struggling economy did not present enough problems for Charlie, the opening of a national change specializing in the same style of ice cream product as Charlie's acerbated the situation. In late August, this national chain opened its doors to considerable fanfare including extensive advertising. The chain offered a much wider choice of products and at a lower price than Charlie could ever hope to offer his products. This presented Charlie with a variety of problems and with few real solutions. Although he had enjoyed two profitable years, he had not had the good fortune of being able to save a great deal as he was paying down the cost of the start-up of his business and the expansions that he felt he needed to make in order to increase what business he did have. He had planned for the future based on the conditions existing in the first two years but had not planned for an extended recession and the opening of a well-financed, chain operation. Perhaps he could have withstood the effects of one of those contingencies but the two of them at the same time and in close proximity presented an insurmountable obstacle.

The greatest asset that Charlie had entering this downturn period was his reputation and the good will that he had developed over the three years that he operated. There was not a person in the community that wanted his business to fail and everyone was disappointed to see the business close. Unfortunately, the struggling economy added another nail to his coffin as the money needed to assist Charlie's cash flow difficulties in the form of a small business loan was not available as the banking industry was just coming out of their own difficulties and loans of that nature were simply not being made. Charlie was caught in the middle of down economy and was unable to find an escape route.

III. Analysis

As earlier indicated, Charlie made many prudent decisions in how he initiated and operated his business. He started with a simple idea, worked hard, maintained his passion, and enjoyed an excellent location. If he failed in any of the usual areas it was in failing to plan appropriately. In hindsight, the two expansions during the good times may have been ill-timed. There is a fine line between irritating customers by keeping them waiting and benefiting from creating the image that your product is so popular that people are willing to wait in line to buy it. Charlie might have been better off allowing the lines to keep waiting and delaying expansion until he had the available capital to do so without affecting his cash flow. Preparing for the recession is also something that he could, or should, have foreseen. Usually such events do not occur in a matter of weeks. Recessions generally occur in cycles and Charlie should have had the foresight to prepare for the event and likely did but due to timing and related factors was unable to…