Failures

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)                  

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.

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