Business Principles

The success of a business depends greatly on managerial effectiveness. If a business is well managed, it will likely earn an adequate income from which it can pay all expenses and earn a profit. If it does not earn a profit, it cannot continue for long. An entrepreneur assumes the risk of success or failure.

Risk -  the possibility of failure - is one of the characteristics of business that all entrepreneurs must face. Risk involves competition from other businesses, changes in prices, changes in style, competition from new products, and changes that arise from economic conditions. Whenever risks are high, the risk of business
failure is also high.

Businesses close for a number of reasons. One out of every four to five businesses fails within three years, and about half cease operations within six to seven years. However, those figures include firms that voluntarily go out of business, such as by selling to someone else or by changing the type of ownership. The results of one study indicated that only 18 percent of all small firms failed within eight years of opening, whereas 28 percent closed voluntarily. The reported causes of business failure are shown in Figure 1-4. Most often, economic and financial factors cause businesses to fail.