Principles of Managerial Finance, 15th Edition

18.4 Business Failure Fundamentals

1. LG5

A business failure is an unfortunate circumstance. Although the majority of firms that fail do so within the first year or two of life, other firms grow, mature, and fail much later. The failure of a business can be viewed in a number of ways and can result from one or more causes.

Types of Business Failure

A firm may fail because its returns are negative or low. A firm that consistently reports operating losses will probably experience a decline in market value, although it is common and not necessarily a sign of alarm when a young, rapidly growing firm generates losses during its growth phase. At one level we could say that a firm that generates returns below its cost of capital is failing. Negative ...