AUTOMATIC AGE
August, 1987
139
HERE
P o o r M a n a g e m e n t Is M a jo r C a u s e
o f B u s in e s s F a ilu r e s
A N unjustified entrance into busi
ness is responsible for a majority
of commercial b a n k ru p tc ie s which
have resulted in recent years in
a recorded loss of more than $7,000
000,000*, a c c o rd in g to information
made available, by the Department of
Commerce.
The major causes of bankruptcy
disclosed in a study completed by the
Department are inefficient manage
ment, unwise use and extension of
credit, adverse domestic and personal
factors, and dishonesty and fraud.
Personal Element Large Factor
The personal element influences suc
cess or failure of a business enter
prise more than competition or other
outside factors, it is indicated. The
lack of economic opportunity, ability
and other requisites for successful
business operation prevent the major
ity of bankrupts from succeeding, it
was pointed out.
An analysis was made of 570 bank
rupt cases in three Massachusetts
counties, which take in the Boston
metropolitan area and surrounding
towns. The study, undertaken by the
Department in cooperation with the
Institute of Human Relations and the
Law School of Yale University, sup
plies the following additional infor
mation :
Poor Accounting Methods
A large proportion of commercial
failures can be prevented by mainte
nance of proper accounting records
and efficient operation of a business
by its owner, by selective and wise
credit extension on the part of credit
ors, and by enforcement of penalties
for dishonest and fraudulent acts.
Bankruptcies have increased enorm
ously in the recent years. Reports of
the Attorney General of the United
States show that bankruptcies, includ
ing noncommercial failures have risen
from 15,662 in 1920 to 60,322 in 1931,
a gain of almost 300 per cent. Losses
to creditors have increased from $179
403,062 in 1920 to $941,033,610 last
year, a gain of more than 400 per
cent. The total loss for the 12-year
period was $7,223,727,656, creditors
receiving an average of only 8.43
cents on the dollar.
Underestimate of Loss
This $7,000,000,000, moreover, is
merely the recorded figure. No rep
resentative estimate of the aggregate
losses from failures can be made; yet
it is evident that they are incredibly
large and that they have a widespread
effect on numerous groups of individ
uals and on our economic system in
general.
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W IT H C A N D Y A N D T O Y S A N D T H E
O T H E R C O L U M N W IT H B A L L G U M
A N D “ P R IZ E " B A L L S .
The business depression has had a
relatively insignificant effect on the
trend of bankruptcies. The statement
commonly and carelessly made in re
cent years that failures are accounted
for by the depression is in a large
measure incorrect.
During 1927 and 1928, a period of
prosperity, about 47,000 concerns fail
ed. During 1929 and 1930, when the
characteristics of a depression were
in evidence, slightly more than 49,000*
failures occurred.
Depression Small Factor
These extremes of the business cycle
fail to disclose any pronounced differ
ence in the number of business fail
ures. The large number of failures
occurring prior to 1929 must be at
tributed to something other than de
pression.
Every business-failure study made
in the past has proved that other
causes were more fundamental and
influential than business depression.
It is probable that the larger propor
tion of failures result from bad judg
ment shown at the very inception of
the business.
The greater number of enterprises
which are launched and later fail have
no economic justification, and lack the
essentials of successful operation. In
that anything short of a miracle would
that anythng short of a miracle would
enable them to avoid failure, and a
temporary lull in commercial activi
ties serves only to accelerate the
movement toward an inevitable end.
Depression, however, is listed by
bankrupts in the Boston region as the
most important cause of their fail
ure. Insufficient capital, competition,
and adverse domestic and personal
factors likewise were in a large meas
ure responsible for the failures, in the
opinion of the bankrupts.
The creditors, on the contrary, said
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