Business Lifecycle - Decline And Death
Businesses fail when customers stop buying their products. This can happen for a number of reasons. The business’s product may become obsolete. For example, sales of buggy whips dropped when cars became common. The business’s products may be too expensive if the business is not run efficiently. In either case, a decrease in sales causes an accumulation of inventory. The increase in inventory signals the business that production needs to be scaled back. Businesses would lay off workers and sell equipment they no longer need, perhaps at scrap value. Revenue from selling equipment and other assets would be returned to the government to be used to partially offset the development of new businesses. So long as demand decreases gradually, the ramp-down in production can be managed at modest cost. Excess inventories can be sold off. If demand drops suddenly and unexpectedly and the inventory and equipment are of no value, the government will recover little of its investment. This is a cost of progress.
Eventually, a business may shrink to a point where a further drop in demand makes the business unviable. It can no longer generate the revenue needed to cover its expenses. At this point it wraps up its dealings and sells off any remaining assets it has. It returns whatever revenue is generated from shutting down to the government. The government uses this revenue to offset the launch and development of new businesses.
By the end of a business’s lifecycle, the government will have invested more money in the business than it gets back. Buying new equipment and developing a product are costly. The sale of the used equipment as the business ramps down does not offset these costs.
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