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Causes and Effect of Corporate Failure Corporate failure could be caused by number of factors, such as; 1) Managerial inefficiency and ineffectiveness 2) Socio-cultural factors. 3) Economic instability. 4) Public policy. 3.1 Managerial inefficiency and ineffectiveness: This constitutes the most pronounced source of corporate failure. The first is lack of a well articulated corporate strategic plan. The derivatives of this could consist of over expansion, ineffective sales force, high production cost, inappropriate costing strategies, low productivity, poor financial management strategy, poor risk assessment strategy (Bhattacharjee, Higson, Holly and Kattuman, 2002). 3.2 Over expansion: A company that undertakes over expansion is likely to immobilize short-term funds thereby creating an avenue for corporate failure. Corporate expansion should therefore be made to follow strictly corporate strategic plan (Mbat, 2001). 3.3 Ineffective sales force: The end result of production is to sell the product. If the sales force is not properly trained and developed, the company may find it difficult to sell its product especially if the product is sold in a highly differentiated competitive market. This situation will create cash flow problem and by implication, solvency problem (Gilman, 2001). 3.4 High production costs: This is a situation where the production cost of a firm makes its product not to compete favourably with other differentiated products in the market. This could be due to over employment of human and material resources or technical inefficiency in the production process (Bowen, Morara and Mureithi, 2009). 3.5 Poor financial management: A firm whose financial manager is unable to take effective financial management decisions is bound to experience acute liquidity problem. Such decisions include investment, financing and dividend policy decisions (Richard and Steward, 1986) and (Preston and Post, 1975). 3.6 Risk assessment strategy: The risk associated with an investment decision should be properly evaluated. The reason is that investments in assets constitute the most important source of corporate earnings. Thus, if risk assessment is not properly done, corporate income would be impaired (Mbat, 2001). 3.7 Inappropriate commercial policy: Policies affecting sales especially credit sales should be carefully evaluated since such could lead to debt build up and by implication liquidity crises (Alo, 2003). 3.8 Absence of manpower training and development policy: A firm that does not have manpower training and development policy cannot make use of well trained and specialized staff that can help in the achievement of corporate objectives. An evaluation of strategic business units will show average poor performance of staff which occupies critical positions in the organization (Bedelan, 1987). Above factors constitute management inefficiency and ineffectiveness. They are very important for observation as an organization moves along the line of achieving its objectives and goals. Other factors which can cause corporate failure are: 3.9 Capital inadequacy: A firm that is undercapitalized is bound to fail sooner or latter. The reason is that the firm will not have enough capital to buy the relevant fixed assets, invest in enough income generating assets or enough working capital. Very often than not, such firms experience underutilization of capacity. This still is an aspect of management ineffectiveness. Moreover, capital structure could create a problem which ultimately ends up in corporate failure. For example, if the capital structure is highly geared instead of being lowly geared it may create income sharing problems (Caballero and Krishnamurthy, 1999). 3.10 Socio cultural factors: A firm that produces products which are not absorbed by the immediate environment will have tough times selling its products. It will force the firm to look for distant markets which will lead to higher marketing costs and inability to sell its products (Hopenhayn, 1992). 3.11 Income instability: Environmental economic instability can lead to corporate failure. The reason being that any downturn in the economy can create some form of financial distress due to a firm’s inability to sell its products (Caballero and Hammour, 1994) 3.12 Public policy: Public policy is a very important external source of corporate failure. When government policy is against the interest of a firm within the short-term period, the firm could go bankrupt. For example, if government places a ban on importation of a firm’s input, production will be impossible when the existing stock inputs are exhausted (Robson, 1996). The possible effects of corporate failure include: 1) Increase in the level of unemployment. 2) Decreasing standard of living. 3) Underutilization of resources. 4) Increase in crime level. 5) Instability of the banking system due to inability to pay back borrowed funds. 6) Instability of the financial markets where short to medium and long-term funds were sourced and corporate failure makes it impossible to meet such obligations
. Remedial measures of minimizing corporate failure The identified causes of corporate failure could be used to minimize its incidence. The most effective measure of averting corporate failure is the institution of a very effective management. The responsibility of management would be to look at all areas of operations to see how efficiency could be induced. Such areas include: 1) Staff training and development. This is important in the sense that the employees are expected to lead all areas of job performance and the essence of training is to make them improve on job performance. 2) Enhancement of productivity and business process re-engineering. These consist three important areas namely: improvement in productivity, application of appropriate financial structure, increasing the level of competitive advantage in the market place. 3) Effective management of the product and product market. 4) Compliance with the provisions of the Companies and Allied Matters Act (CAMA) 2004. The product market is where the firm generates its income, attains its strategic objectives and goals as well as achieves long-term success. Management should continuously monitor the following factors to see how they could be brought under control. These are: 1) Sales price variance. 2) Sales volume variance. 3) Sales mix variance. 4) Sales quantity variance. 5) Market size variance. 6) Market share variance
