What are the major causes of business failure?

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What are the major causes of business failure?

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Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
(1) What are the major causes of business failure?

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
(2) Do business failures occur evenly over time?

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
(3) Which size of firm, large or small, is more prone to business failure? Why?

Explanation & AnswerSolution by a verified expert

Explanation

Economic and financial factors or a combination of both factors cause business failures. The economic factors include industry trends, company-specific problems, change in consumer preferences, and technology change. The financial factors include high debt in the capital structure or changes in the interest rates.

Verified Answer

Business failure is due to a financial distress caused by economic and financial factors or a combination of both the factors.

Explanation

Business failures do not occur evenly over time, nor do businesses are always immune. Various business failures occur each year, generally small firms. But large businesses also go bankrupt over time. Business failure occurs due to a decline in the present value of future cash flows caused by economic and financial factors or a combination of both factors. The firm's success or failure depends upon the sector the company is in, the state of the economy, and the operations of the company. During the Great Recession, many business failures occurred when six of the largest bankruptcies occurred in 2008 and 2009.

Verified Answer

Business failures do not occur evenly over time, nor do businesses are always immune. Business failure occurs due to a decline in the present value of future cash flows caused by economic and financial factors or a combination of both factors—this why many business failures occurred during the Great Recession

Explanation

Small firms are more prone to business failure due to a lack of capital and inadequate management facilities. Small businesses may run out of working capital, may set the price of their product too low to eliminate the competition; thus, are unable to cover their costs. Small companies may face difficulty in obtaining capital for operations or expansion. In some small companies, the owner is the only one in the senior management, which can lead to mismanagement of some aspects of the business. However, large businesses have means to enhance their capacity for obtaining capital at higher costs. But the large businesses are not protected by business failures. In fact, during the Great Recession, many business failures occurred when six of the largest bankruptcies occurred in 2008 and 2009.

Verified Answer

Small firms experience more business failure due to a lack of capital and inadequate management facilities.

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