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10 Common Reasons for a Business Bankruptcy


Oct 8, 2020
10 Common Reasons for a Business Bankruptcy

The news of the bankruptcy of a well-known tea company, Sariwangi, is still fresh in the memory. The announcement issued by the Panel of Judges at the Central Jakarta Commercial Court suddenly shocked many parties.How come? The tea product, which is famous for its creative advertisements, is still circulating and selling well in the market.

Debt as one of the causes for bankruptcy of a business is pointed out as the reason why the company, which was first established in 1962, was declared bankrupt.Bankruptcy or what in English is called bankruptcy is a condition when an individual or an organization (in this case including a company), is legally deemed unable to pay their creditors.
According to the KBBI, bankruptcy is when a person or business suffers a large loss so that their assets are used up.

Types of Bankruptcy

Bankruptcy is also known as a company liquidation or business closure due to a failure within the company. This failure can occur in two forms, namely:

Economic Failure

Economic failure or economic distressed occurs when a company loses its revenue or money so that it is unable to finance its operational activities.This means that the company’s profit rate is less than the cost of capital or the company’s current cash flow value is less than its liabilities.This kind of failure can occur if the company’s cash flow is far below the expected value. Financial failure can also occur when the level of return on investment is less than the capital issued by the company for that investment.

Financial Failure

Financial failure or financial distressed occurs when a company experiences funding difficulties, both cash and capital for operational activities. Companies can prevent financial failure by using a portion of asset liability management.

Common Causes of Business Bankruptcy

In general, there are 10 reasons why a business can go into bankruptcy. Check out the causes of business bankruptcy in the following description!

1. Debt

Reflecting on the case that happened to PT Sariwangi Agricultural Estate Agency, debt turns out to have a big opportunity that could cause a business to go bankrupt. At that time, Sariwangi borrowed 1 trillion which was planned to be used to increase the productivity of their tea plantations which ultimately failed. The imbalance between the capital owned and the size of the company’s debt causes profits to continue to decrease. In the end this will cause continuous losses and make the company have to be willing to declare its bankruptcy.

2. Giving Control to the Wrong People

When you are just starting out in business, it is important to know who you authorize. At the beginning of starting a business, having complete control is something that is mandatory for you. As the owner, you are the one who understands better the condition of the company inside and out. The sense of belonging inside also makes you more careful and considerate in making a decision. Compare the situation if you leave the big task to someone else. In addition to trust that is not necessarily maintained, you will also lose the opportunity to see and take opportunities that arise while managing the business.

3. Ineffective and Inefficient Company Management

Company management is considered effective when the desired goals can be achieved in a timely manner. Meanwhile, management is said to be efficient when the company is able to achieve optimal results with minimal use of resources and capital. Many companies must be willing to lose a lot of money because they fail to maintain their operational effectiveness and efficiency, so they have to end up going bankrupt.

4. Reluctant to innovate

No matter how successful a business is, if you just stay there you will definitely be left behind. Every company must be able to sensitively read the situation and developments around it. We can learn from the bankruptcy of Kodak, a company known as one of the largest camera distributors in the world. The company’s inability to keep up with the increasingly demanding digital era transformation forced Kodak to go out of business. From the Kodak case, we can also learn that flexibility and sensitivity are also important keys for a business to be sustainable.

5. Not close to consumers

The communication you build with consumers is not just about making sure they are satisfied with the service provided. There are lots of strategies that can be formulated by reading market movements including competitors. By establishing good relationships and communication with customers plus the best service, you can find out what they want. Proximity to consumers can also help you read trends and find out what steps your competitors are taking. If you are lucky and move wisely, besides avoiding bankruptcy you can also get one step ahead of your competitors.

6. An Unstable Global Economy

If the previous five reasons refer to internal problems within the company, then the next point will discuss problems that occur from outside. The most common cause that can lead to a company going bankrupt is the economic situation that is not good globally. When the world economy declines, economic growth will also decline and business will become sluggish. Many people choose to save money rather than spend it.
This decreasing level of consumption will indirectly affect businesses in many sectors.

7. Changes in Government Policy

There are many reasons why changes in government policy can affect the running of a business and even make it bankrupt.The policy of removing subsidies, the existence of new rules and tariffs related to exports and imports to burdensome banking and labor laws can all be factors causing a business to decline.

8. Changes in Customer Consumption Patterns

As previously mentioned, a company must be able to follow the movements of market tastes. But sometimes this change is something that simply cannot be overcome by simply innovating.Therefore, as an entrepreneur you should be able to read about the new opportunities that have arisen to avoid bankruptcy due to the loss of your customers.

9. Scarcity of Raw Materials

For a business that relies on its supply of raw materials, that’s where the company’s life resides. When suppliers can no longer meet demand for raw materials, automatic production will not work. Crisis, force majeure such as natural disasters and accidents are usually the causes that most often trigger the scarcity of raw materials.

10. The Appearance of Deadly Competitors

This is the reason why it is equally important to pay attention to the movements and steps of your competitors when running a business.Countless companies out there have been forced to lose customers because of new, more promising and attractive competitors.Customers who move one by one make them lose the market and go bankrupt.

In addition, bankruptcy can also occur as a result of improper decision making in the past. The failure of company management to take action when and when needed. The failure of a business often occurs because many positions are occupied by people who do not have the right qualifications. Lack of skills, experience and lack of initiative resulted in failed company goals.