The Reasons for Financial Failure and Bankruptcy

Introduction

Globalization and digitalization, which are the main trends of today, have severe consequences for businesses. Due to the increasing integration of national economies, companies operate in a more challenging competitive environment. Businesses need to generate enough cash flow to pay off their obligations and partner return expectations to stay in business. In an ever-increasing competitive environment, some companies may be successful while others may fail. While business success can be defined as the ability of firms to retain their economic lives aligned with their goals, business failure can be expressed as the inability of businesses to continue their existence. The failure of a company is not a condition that happens immediately; instead, it is a situation that results from a series of occurrences that cascade like dominoes. In the process of failure, some businesses may face a financially difficult situation. Due to various internal and external reasons, firms experience efficiency loss during this negative process. The financial failure of the business occurs when it cannot meet its obligations to creditors. Companies that cannot develop adequate solutions to prevent their financial failure may face bankruptcy, a further stage of financial failure. In other words, financial failure is a warning before bankruptcy. An official declaration of financial failure is bankruptcy. Even though it's widely acknowledged that bankruptcy is the clearest sign that a company has failed, it just means that its operations have been formally ended. When monetary issues such as a lack of cash or the inability to meet obligations persist and cannot be fixed, businesses must stop operating. Business bankruptcy is the term used to describe this situation. The company is only considered bankrupt if a court has made a formal bankruptcy ruling.

The appearance of a negative difference between income and expenses, in other words, the loss of the business for a period, does not mean bankruptcy. However, this loss may indicate that the firm needs to develop a few new strategies to correct its internal difficulties and adverse environmental conditions. Companies will only survive if they can identify the causes of financial failure fully and accurately and take sufficient precautions to prevent it. It is also very important that these measures are taken quickly enough. If the required steps are implemented on time, the business can resume its regular operations (Çavuş&Başar, 2020, p.294). In such a circumstance, firms turn to various recovery strategies (merger, sale of subsidiaries, etc.) to carry on with their operations. For instance, businesses that are deeply indebted while also experiencing a steady decline in business may merge with other companies or sell off their assets to survive because bankruptcy is the worst and final option. A company must have regular, large losses to discuss about the risk of going bankrupt. Companies that can no longer operate can go into liquidation. Another option for a company that has filed for bankruptcy is restructuring. This study investigates the reasons for a firm's financial failures and bankruptcy. Various indicators can be used to determine whether a business is insolvent. According to Aktaş et al. (2003), losing half the capital, losing 10% of the company's assets, losing three years in a row, having trouble paying off debts, ceasing production, and having more outstanding obligations than total assets are some of these signs.