Automatic Age

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 E E K L Y P R O F IT B Y F IL L IN G O N E
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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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