4 Basic Economic Reasons Why Businesses Fail

Most people dream of owning their own company, but there is fear in many people to start up their company because of risk factors. According to gov.uk in UK there are about 3.4 million active registered companies, whereas in Europe there are over ten million registered companies. Many people have great ideas and knowledge to start up their company and as well as to make it successful but even then there are many companies that fail. There many other reasons why businesses fail but this article focus on the economic reasons. It is hard for the companies to manage the economic activities because they cannot manage or control the monetary policies and fiscal policies. 

Increase in Tax

An increase in tax forces the companies to increase the price of their goods which results in reduction in sale. The reduction in revenue will forces the company to reduce wages and the number of employees in the company to reduce cost. If their sale keeps declining then these companies will not be able to bare the cost of running the businesses, which will force their business to fail.

Increase in Interest Rate

When central bank increase interest rate then it increases the cost of borrowing, these are directly effected by small companies because they depend on taking loans to operate their businesses. It also has an impact on the big companies because their employees will have to pay higher interest rate on their mortgage which will reduce their disposable income. Reduction in disposable income will reduce the sale for many companies, which will force their business to fail in the long run.

Export and Import Policies

High export duty is not advisable for most of the countries because then these companies also have to pay import tax in another country which will increase the price of their products, that way they will have low sale. High export tax reduces the market size of the businesses therefore they will depend on the local market. It puts barriers for them to expand their businesses where in long run their business will fail because of an increase in competition. Import duty is very hard for the government to set, because reduction in import duty will increase in imported goods which will increase the competition for local businesses. Increase in import duty will also course the businesses to fail because there many import companies.

Unemployment

Businesses fail because of high unemployment in economy. If people do not have a job then they will not have any income, when people do not have money to spend, therefore businesses will not be able to sell their products and services. They will shut down their company because of low revenue, they will not be able to pay the salary of employees and other expenses.