Why new businesses face a higher risk of failure
Explain how limited experience, finance, customer evidence and cash timing can make a start-up more vulnerable.
Section 1 · Understanding business activity
Exam scope and assessment notes
Cambridge IGCSE Business Studies 0450, 2026 syllabus, Version 2. Use the 2026 A*–G route; this qualification changes to 0264 for first assessment in 2027. Candidates are not assessed on constructing income statements or statements of financial position, nor on price-elasticity or exchange-rate calculations. Simple cash-flow forecast construction is assessed. Written practice is self-checked, not an official Cambridge grade; timed-paper evidence and human subject-teacher review remain outstanding.
Before you begin
- No previous business study is assumed. Identify the decision, the business context and the evidence that supports each claim.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which factor can make a new business more vulnerable?
What you will learn
- Identify causes of business failure
- Explain why new businesses may face greater risk
- Use evidence without claiming failure is certain
Start-ups have less operating evidence
A new business may have little trading history, a small customer base and limited information about costs or demand. Its owner may also be learning management, recruitment and financial control while the business begins operating.
These gaps can make forecasts less reliable. If sales arrive later or cost more than expected, the business may struggle to pay suppliers, rent or wages even when the product idea seems promising.
Risk is higher, not inevitable
Established businesses can also fail because of poor decisions or external change. New businesses may be more exposed because they have fewer repeat customers, smaller cash reserves, limited access to finance or less experience responding to competition.
A business plan, market research, cash-flow forecast and relevant skills can reduce uncertainty, but none guarantees success. Evaluate the quality of the evidence and the business's ability to adapt.
Pause and explain
What does a business plan do for a start-up?
Worked example
A new delivery firm wins orders but pays drivers before customers settle invoices. Explain why its age and cash timing may increase failure risk.
Show the worked solution
- The firm has early sales but may not yet have a stable history of receipts.
- Driver payments fall due before customer cash arrives.
- A cash shortfall can interrupt service even if the business is making sales.
Answer As a new firm, it may have limited reserves and little history to predict payment timing. If driver costs fall due before customer receipts, it could lack cash to continue operating; a forecast and suitable working capital may reduce, but not remove, the risk.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A start-up estimates 1,000 sales but has only surveyed 12 friends. Explain one weakness in its demand forecast.
Give me a hint
Compare the sample with the target market and actual purchases.
Compare my reasoning
- The sample is small and may be unrepresentative.
- Friends may have different preferences from target customers.
- Stated interest may not become paid sales.
The forecast relies on a small, possibly biased sample of friends. Their interest may not represent the wider target market or translate into purchases, so the owner should test demand with more relevant customers and compare stated interest with actual sales.
Look for these in your work
- Sample limitation identified
- Representativeness explained
- Follow-up evidence suggested
A new shop has positive sales but cannot pay its rent on time. Explain how sales and cash can diverge.
Give me a hint
Use the timing of credit sales and cash obligations.
Compare my reasoning
- Customers may buy on credit and pay later.
- Rent may be due before receipts arrive.
- A cash-flow forecast can show the timing gap.
The shop may record sales before collecting the money, while rent is payable on a fixed date. A forecast can identify whether receipts arrive in time and help the owner plan an appropriate short-term response.
Look for these in your work
- Sales and receipts distinguished
- Payment timing linked
- Forecast use explained
An established retailer closes after a major competitor opens nearby. Explain why this does not disprove the higher risk faced by many start-ups.
Give me a hint
Compare one event with a general risk, not a universal rule.
Compare my reasoning
- Established firms can still face external threats.
- Start-ups may have fewer reserves or less customer history.
- A higher risk does not mean every new business fails.
An established firm can fail when competition changes. Start-ups may still face greater average vulnerability because they often have less cash, customer evidence or experience; the comparison is about risk, not certainty for every firm.
Look for these in your work
- Established-firm risk acknowledged
- Start-up vulnerability explained
- Probability language used
Common mistakes
- Saying all start-ups fail
- Treating sales revenue as cash already received
- Assuming a business plan guarantees survival
What can you explain now?
Why can a new business be more exposed to a cash-flow problem?
Compare with the explanation
It may have limited reserves and little evidence about payment timing
A short history can make forecasts uncertain, while obligations still fall due.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Name two reasons a new business may be more vulnerable and one action that can reduce uncertainty.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.