Bankruptcy: the concept, causes and factors causing it

Bankruptcy is the insolvency of the debtor, which has or acquires a stable character, recognized by the economic court or lawfully declared by the debtor.

In economically developed countries, bankruptcy is considered as a normal phenomenon of economic life. It is designed to play a crucial role in the system of functioning of the economy at both the macro and micro levels. At the macro level, bankruptcy helps to eliminate inefficient and unprofitable enterprises and improve the economy as a whole, increase its competitiveness.

At the micro-level , the threat of bankruptcy (loss of invested funds, business reputation, etc.) makes it necessary to look for and apply modern effective methods of organizing production and labor, planning, and financial management in the enterprise.

As foreign practice shows, none of the states that have experienced a crisis in the economy (Japan, Sweden, China, Germany, etc.) was not without solving the problem of unprofitable enterprises. Every year, in a market economy, an average of 2 to 6% of all kinds of enterprises are insolvent.

Bankruptcy is the result of the development of the crisis financial state of the enterprise, when it goes from episodic to stable inability to satisfy the requirements of creditors, including on relations with the budget.

The causes of crisis situations are hidden in the market economy itself, caused by the constant change in the market orientation of the consumer.

The successes and failures of the enterprise should be considered as the interaction of a number of factors – external, on which it can not influence, and internal, which, as a rule, depend on the organization of the work of the enterprise itself. The ability of an enterprise to adapt to changes in external (social) and internal (technological) factors is a guarantee not only of its survival, but also of prosperity.

External factors that have a strong impact on the activities of the enterprise include:

the size and structure of the population’s needs; the level of income and savings of the population, and hence its purchasing power (this may also include the price level and the possibility of obtaining consumer credit, which significantly affects entrepreneurial activity); political stability and the orientation of domestic policy; development of science and technology, which determines all the components of the process of production of goods and its competitiveness; the level of culture, i.e. habits and norms of consumption, preferences of some goods and negative attitudes towards others; international competition, in which foreign firms in some cases benefit from cheap labor, and in others from more advanced technologies.

The financial situation of most enterprises is also negatively affected by the consequences of the general economic downturn, inflation, often expressed in the merger of firms and the unexpected emergence of new competitors, as well as unexpected changes in the field of state regulation, a sharp decrease in the state order, which is very characteristic of our country in recent years.

Of course, it is impossible for an individual small or medium-sized enterprise to deal with a crisis of national proportions, but its flexible policy can significantly mitigate the negative consequences of the general recession in the economy.

Internal factors that determine the development of the enterprise and are the result of its work, in general terms, can be grouped as follows:

philosophy of the company; the principles of its activities; resources and their use; the quality and level of use of marketing;

Monitoring of bankrupt US firms shows that from the point of view of the bankrupts themselves, the causes of bankruptcy are mainly external factors, such as a general decline in business activity, lack of capital, competition, non-payments. Creditors, on the contrary, consider the internal factors of the enterprise and, above all, the inefficiency of management to be the main causes of bankruptcy.

In a classical market economy, as noted by Western experts, external factors determine 1/3, and internal 2/3 of all bankruptcies.

There are cases of false and malicious bankruptcy. False bankruptcy is the provision of knowingly false documents on the declaration of a business entity as insolvent (bankrupt). Malicious bankruptcy is the deliberate concealment of one’s insolvency. False and malicious bankruptcy is a type of fraud that must be recognized by internal and external auditors, as well as law enforcement agencies of the state.