The role of bankruptcy forecasting in the company management

Abstract

Four types of the company failure process are observed: fundamentals of failure, detecting failure, exit of failing company and bankruptcy or recovery. Between these four types of company failure process, there exist major distinctions in terms of the presence and the importance of specific causes of bankruptcy, i.e. incorrect steps made by management, incorrect steps in the corporate policy and the importance of external factors. The interest for the analysis and for the understanding of business failure can notably be explained by the fact that a large number of stakeholders are concerned with the firm’s activity and with its evolution over time. The results of the paper are based on qualitative research and the findings of previous studies the presented scheme of business failure process explains why and how companies fail. It is based on an analysis of the existing literature and of its limitations and it represents the different general phases which a company goes through in its evolution towards a potential failure. It presents for each chronological phase a series of failure factors. Furthermore, the failure process can be very different from one company to another, i.e. different sequences of failure factors are possible. Based on the findings, owners of a company can have a clearer view of time dimension inherent in corporate failure and the impact of their own actions on bankruptcy. The paper lays the ground for understanding the process of company failure. It offers owners, managers information about the potential causes and consequences of the failure of their company. This model allows them in the early stage of company failure to understand and find remedies to failure causes. So, it helps organizational leaders to identify strategies to prevent failure.