Why Businesses Fail is explained with financial literacy

Bankruptcy, that is, insolvency, that is, net assets or owners' equity become negative. This situation will not occur in normal business finance, but there is a large loss during the operation period, the total loss exceeds the investment amount, the owner's rights and interests no longer exist, and it will go out of business, and the assets of bankruptcy liquidation must be paid to creditors first, and the rest will be divided by investors. The remaining assets are due to the possibility of increasing the value of certain assets, and in the financial accounts, the assets are less than the liabilities at the time of filing for bankruptcy.

Assets = liabilities + owners' equity, one of the most common situations of bankruptcy is insolvency, that is, small assets and liabilities, according to the accounting identity, at this time, the owner's equity of the enterprise is negative.

There is also a situation where due to cash flow problems, although the owner's equity is still positive, but because there are not enough assets (funds) to repay the debts due, it may also lead to the bankruptcy of the enterprise, that is, although the total assets are enough to repay the debts (book value), but the other party wants you to repay the debts with monetary funds, but you have no cash on hand, which eventually leads to bankruptcy.

The business is closed or closed, generally said to be insolvent, such as: the product is unsalable, can not be realized, the capital chain is broken, the debt accumulates, the creditor forces the debt, of course, you can reach a settlement with the creditor, and there is no need to go bankrupt after the settlement, such as debt restructuring, deferred payment, or something, but why the enterprise will still fail, from a financial point of view, because there is no liquidity can not continue to operate, and eventually forced to go bankrupt, this possibility is the greatest. Of course, there are other possibilities as well.

(1) Blind expansion, too fast growth rate makes business management and financial capacity unable to keep up.

If you sail against the current, if you don't advance, you will retreat, and the same is true for running a business. Successful companies always strive for their own growth, but without clear goals, realistic expansion plans, and sufficient resilience to risks, hasty growth will only paralyze a well-functioning enterprise system. Overly optimistic estimation of market prospects and blind investment, expansion is too fast, the cost is huge, so that the financial resources are not enough to support the rapid expansion of enterprises, the growth of investment demand and the growth rate of cash flow do not match, can not meet the rapid expansion of a large amount of funds, resulting in cash flow, into bankruptcy and bankruptcy.

2) The asset structure is unreasonable, the self-owned funds are insufficient, the liabilities are excessive, and the development is especially dependent on bank loans.

The capital structure of the enterprise is unreasonable, the asset-liability ratio is too high, and it is easy to be unable to repay the due debts due to the influence of certain economic fluctuations and their own business strategies. According to the survey report released by the research team of the Research Bureau of the People's Bank of China, China's real estate industry has the problem of relying too much on bank loans for real estate development funds. In recent days, reports on the bankruptcy and loan acceptance of Zhejiang Zhongjiang Group have received continuous attention from various leaders.

Due to the lack of sufficient business risks and the implementation of a financial early warning system, a large number of foreign debts are borrowed for debt management (Zhongjiang Group's debt scale is 8 billion yuan, and bank loans are about 5 billion yuan), when the liquidity is insufficient and profits decline, it will inevitably lead to the rupture of the capital chain.

3) Cash flow management is chaotic, with little flexibility and poor liquidity.

First of all, some enterprises have an unreasonable cash flow structure, missing or invalid cash budgets, negative or small cash flow from operating activities, and a shortage of funds. As the most liquid capital of enterprises, cash should have a good cash flow mechanism for economic activities, so that even if there is a temporary funding gap such as bank debt collection, it can be partially resolved through sound cash budget arrangements and reasonable capital scheduling. In addition, there is a lack of good cash management and no cash risk warning.

Many businesses are not insolvent and continue to lose money and go bankrupt. However, due to the lack of cash process management, the distribution of cash flow and the distribution of debt maturity structure are unbalanced, resulting in temporary ineffective capital turnover, resulting in the inability to repay debts when due and falling into black bankruptcy. In addition, enterprises have not established an effective cash flow risk early warning system, cannot predict risks, and do not have any preventive measures, so they often rush to the doctor.