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Business Failure Fundamentals

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Rose Ann MArtinez

on 27 March 2014

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Transcript of Business Failure Fundamentals

Although bankruptcy is an
obvious form of failure, the courts treat insolvency and bankruptcy in the same
way. They are both considered to indicate the financial failure of the firm.

1. A firm may fail because its returns are negative or low.

2. Insolvency-it occurs when a firm is unable to pay its liabilities as they come due.

3. Bankruptcy- the most serious type of failure
-occurs when the stated value of a firm’s liabilities exceeds the fair
market value of its assets.

Strategies to be used
Business Failure Fundamentals
business failure
is an unfortunate circumstance. Although the majority of firms that fail do so within the first year or two of life, other firms grow, mature, and fail much later. The failure of a business can be viewed in a number of ways and can result from one or more causes.

1. Mismanagement
- the primary cause of business failure

2. Economic activity
-especially economic downturns--can contribute to the failure of a firm.

3 .Corporate maturity
- a final cause of business failure

An arrangement between an insolvent or bankrupt firm and its creditors enabling it to bypass many of the costs involved in legal bankruptcy proceedings.

Normally, the rationale for sustaining a firm depends on whether the firm’s recovery is feasible. By sustaining the firm, the creditor can continue to receive business from it.

Voluntary Settlement to
Sustain the Firm
Overexpansion, poor financial actions, an ineffective sales force and high production costs can all singly or in combination – this will all cause failure

1. Extension

-An arrangement whereby the firm’s creditors receive payment in full, although not immediately

2. Composition

-A pro rata cash settlement of creditor claims by the debtor firm; a uniform percentage of each dollar owed is paid

3. Creditor control

-An arrangement in which the creditor committee replaces the firm’s operating management and operates the firm until all claims have been settled.
Voluntary Settlement Resulting in Liquidation
The objective of the voluntary liquidation process is
to recover as much per dollar owed as possible.

* Under voluntary liquidation, common stockholders (the
firm’s true owners) cannot receive any funds until the claims of all other parties
have been satisfied.


- A voluntary liquidation procedure by which a firm’s creditors pass the power to liquidate the firm’s assets to an adjustment bureau, a trade association, or a third party, which is designated the assignee.

The assignee is sometimes referred to as the trustee because it is entrusted with the title to the company’s assets and the responsibility to liquidate them efficiently.
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