Windows 2008 R2 Backup Failed, The system cannot find the file specified

What:

Windows Backups on Microsoft Windows 2008 R2

Problem:

Windows Backup Failed: The system cannot find the file specified. or
Windows Backup Failed: The device is not ready.

Solution:

Windows Server Backup relies on multiple layers in the operating system to function. One of them are (VSS) shadow copies.

When Windows Backup runs, shadow copies are created (even if they are disabled), so there has to be enough free space on the drive.

If you have plenty of free space then you might need to change shadow copies allocated space:

1. Right click on the drive and select "Shadow Copies"
2. Select a volume and click Settings
3. Change Maximum size limit to a higher value

Make sure to check logs for any errors.
Open up "Server Manager" select "Roles" and wait a moment for summary to load. It will give you an overview of warnings and errors, which you should resolve.

I also recommend to run a Windows "Disk Defragmenter". It will take a while to complete, so be patient, but in my case benefits were huge. No more failures and backup now takes half of the time to finish.