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Information > Financial Terms > This page Failures Business failures
are the mortality of business firms.
Failures are regarded as an important business barometer, although
fundamentally they are results and effects of underlying business trends,
rather than motivating causes. As
may be expected, the number of failures and their total liabilities tend
to vary directly with the business cycle. Economic failure:
A business firm which is unable to earn the representative or "going"
rate of profit for its line of business, to justify continuance of the
invested capital in the firm, may be said to be an economic failure.
Indeed, in economics (microeconomics, or that branch of the subject
which is concerned with economic theory of the firm), it is customary
to include as part of costs of the firm the representative or "going"
rate of profit for its line of business. Failure in the bankruptcy sense: A
business firm may be bankrupt, and hence a failure in that its liabilities
exceed its assets and therefore there is no net worth.
See appended table. Business failures
of firms both in the equity and in the bankruptcy sense may be accorded
relief under the Federal Bankruptcy Code of 1978, codifying and enacting
the laws relating to bankruptcy as Title II of the U.S. Code, and replacing
the former National Bankruptcy Act as amended, effective October 1, 1979.
The term bankrupt is replaced by the term debtor. Statistics on business
failures are prepared and published regularly by DUN & BRADSTREET
(D&B) which firm reports failures by divisions of industry and trade,
by size of liabilities, by industry groups, in large cities, by Federal
Reserve Districts, by geographic regions and states (U.S.), and Canadian
failures (by provinces). The
Dun's Failure Index is also compiled and published regularly. For the D&B
series, "Business Failures" include those businesses that ceased operations
following assignment or bankruptcy; ceased with loss to cre4ditors after
such actions as execution, foreclosure, or attachment; voluntarily withdrew
leaving unpaid obligations; were involved in court actions such as receivership,
reorganization, or arrangement; or voluntarily compromised with creditors
out of court. Liabilities,
as tabulated in the failure record, include all accounts and notes payable
and all obligations, whether in secured form or not, known to be held
by banks, officers, affiliated companies, supplying companies, or the
government. They do not include long-term, publicly held obligations, and
offsetting assets are not taken into account.
But all industrial and commercial failures that are petitioned
into the federal bankruptcy courts are included in the failure count. The
U.S. Department of Commerce carries the D&B statistics on Industrial
and Commercial Failures, both as to numbers and as to total current liabilities,
and the Failure Annual Rate (number per 10,000 concerns listed in D&B's
Reference Book), in its monthly Survey
of Current Business and its Business Statistics,
the biennial supplement to the Survey
of Current Business. |