A business may cease operations and voluntarily wind up its affairs. Any assets owned by the business are sold. The business stops operating because the owner may wish to retire, wants a change of lifestyle or, in the case of a sole trader, has died,

However, most businesses cease to trade due to business failure. With debts increasing and a negative cash flow, a business owner will soon realise if their business is underperforming. To prevent this accumulation of debt, the owner will need to cease operating the business of their own accord, that is undergo voluntary cessation.

Most businesses, however, finish involuntarily. The owner is forced to cease trading by the creditors of the business, that is, undergo involuntary cessation. Creditos are those people or businesses who are owed money.

Even though a business appears to be in financial difficulty, many owners continue operating in the hope that things will get better. In many cases they do not. As the business continues its decline, creditors become worried about the money they are owed and force the business owner into winding up the business.

Business failure is not usually caused by just one single factor but rather a combination of several. Factors such as an ill-conceived business idea, failure to meet customers needs, producing a product which few people want or need, not preparing a business plan, ignorance of existing competition and lack of management skills could all contribute to a businesses failure.

However, two main causes of business failure, particularly small businesses are:

Lack of sufficient money – undercapitalization. Many small businesses start out on a shoestring budget. Without sufficient capital the business will not be able to purchase stock and materials. This inevitably results in lost sales and falling profits.

Lack of management expertise – when a business either fails to prepare a business plan or fails to keep on modifying an existing plan as the environment changes, the stage is set for imminent failure. It is this situation which gives rise to the often quoted saying: ‘businesses don’t plan to fail, they fail to plan’.

A business may cease operating, either voluntarily or involuntarily. The difference between the two depends on who instigates the process.

Suggested Reading:
+ Marketing Plan, Market Analysis and Sales Forecasting In A Business Plan
+ Types of Business Ownership, Their Advantages and Disadvantages
+ Human Resources Tips