"Why do companies go bust"

Recently I attended at a seminar with the title "Why do companies go bust"

They really got involved, went into so many areas such as corporate responsibility, training of directors, bad forward planning, accounting failures but I think these areas are only excuses to cover up the real reason for business failure. They run out of money!

This happens because in all these areas such as the breakdown of corporate responsibility, untrained directors, bad forward planning, accounting mistakes all add up to a failure generate the income required to meet expanses, with the result that companies start borrowing to meet the rising expenses in the belief that the income will rise to meet their expenses.

So, the reason companies go bust is due to too much bad debt.

Companies forget that good debt is debt that costs less than the income is will generate, bad debt is when it goes the other way.  So, it is bad debt when it is created to meet the gap between sales and expanses, this doesn’t make money, it costs, which in the end will bring down the company.

The danger is that good debt can turn into bad debt, very easily.

An example is when a private equity company buys a retail company with several millions of borrowed money, once they own it they transfer that debt into the company, allowing the Private Equity people to walk away with a lot of money, but leaving the company with a large lump of bad debt.  So long as the income is there it worked successfully until the bad debt could not be supported by sales due to the rise in internet sales.  This lead to some of the high street’s oldest names going down, such as BHS, Woolworth, Maplin and Blacks Leisure to name a few.

How does this relate to you? It should relate to you as a warning to make sure your good debt doesn’t turn to bad debt.

That’s Think Cash!