Top 15 reasons of insolvency

What is the main driver of insolvency cited by executives: incorrect strategies or financial crisis? Find out about the reasons underlying insolvency among companies.
Incorrect strategy/investment decisions (54%)

More than half of the insolvencies are caused by incorrect strategic and investment decisions, according to the key findings of A.T Kearney’s recent study that analyzes the most frequent reasons for insolvencies.

The management consultancy A.T Kearney surveyed more than 1,200 recent insolvencies in Europe.

Cost structure too high (39%)

39% of the insolvencies analyzed by A.T Kearney are traced back to high costs structure. The number of insolvencies increased by 60.35% in January –May 2009, year-on-year.

Insufficient liquidity (38%)

Another frequent reason for company insolvencies is the insufficient liquidity, found in 38% of the cases, A.T Kearney study found.

In a financial market crippled by the global crisis, financing from banks and non-banking financial institutions have become scarcer and harder to qualify for.

In these cases, the question would be whether there are alternative financing measures and generally what to do with the available liquidities.

Belated/inconsistent response (34%)

More than a third of the respondents, said that belated and inconsistent management response to the crisis was the main reason for insolvency.

Insolvency applications increase in the current market conditions, with many companies claiming insolvency of other economic actors on debt default.

Value chain dependency (23%)

Value chain dependency or dependency between a company’s activities is a reason cited by nearly a quarter of respondents as the main reason for insolvency.

Management conflicts (20%)

Surprisingly, a fifth of the respondents invoke management conflicts as main driver of insolvency among companies.

The conflict is thus an inevitable reality of every society, being generated by labor division.

Conflicts between workforce and management (20%)

In a similar proportion, (20%) conflicts between employees and management is one of the main factors driving insolvency procedures. In theory, conflicts are present in the company’s every-day life.

Inadequate controlling (18%)

In a smaller share, 18% of the companies who participated in the study said that an inadequate controlling has all the potential of steering the business toward insolvency.

In the evolutionary theory, survivors are those who adapt to changes. As for litigation market and dispute resolution, adaptation requires the understanding and grasping of own market specific rules. In other terms, it is stabilization and cleansing of the market.

Crisis in business or industry sector (17%)

Crisis in business or industry sector was cited as insolvency drivers by 17% of the respondents.

The sector in Romania that carries the greatest risk was retail business, that increased by 49.85% year-on-year, where 3,553 cases of insolvency were registered, according to a report by Coface.

Economic crisis (16%)

Apparently, economic crisis is not the main factor that drives a company to insolvency, with only 16% of the respondents citing this factor.

“In Romania, most of key decision makers are either underestimating or overestimating the crisis. In addition to that, many Romanians believe that in the neighboring countries, such as Hungary or Ukraine, the effects of the recession are much worse than in their own country. Many of them don’t believe yet the current situation could emerge towards a crisis status. Based on our scenarios we are expecting an “unfavorable wake-up call” with clear request for sustainable and measureable results across key industries in Romania”, said Michael Weiss, Vice President of A.T. Kearney.

Uncooperative attitude on the part of banks (15%)

Managers say the uncooperative attitude on the part of banks may constitute a reason for insolvency.

The primary drawbacks to debt restructuring process are the entrepreneurs’ failure to acknowledge their problems and banks’ reluctance in accepting debt restructuring proposal coming from a business partner rather than a client in distress.

Weak competitive position (15%)

Market positioning is another reason signaled by executives surveyed by A.T Kearney.

At the end of 2008, some 14,489 companies in various stages of insolvency, 6,022 companies were running the general procedure of insolvency, 3,672 were already out of business, and 18 in legal restructuring.

Lack of skills management (13%)

Only 13% executives take the responsibility of insolvency upon themselves, citing the lack of skills management as main reason for the company failure.

Attitude of shareholders (5%)

Shareholders are responsible for insolvency in only 5% of the cases analyzed by A.T Kearney.

“There is no prospect of an end of the economic and financial crisis. But most enterprises still have sufficient scope and are not limited to short-term response. Sooner or later demand will recover. Companies should therefore implement short-term measures to ensure liquidity and at the same time realign their strategy for the time after the crisis. To sustainably secure a competitive edge and profitable growth, decisions required in the short term should always follow a long-term strategy even in periods of crisis”, said Dr. Juergen Rothenbuecher, Head of A.T. Kearney„s Strategy Practice.

Fiscal problems (4%)

Surprisingly, a small share of the respondents cited the fiscal problems as the main factors leading the company to insolvency.

A financial crisis requires a change of mentality in terms of fiscal policy in Romania, which is expected by nine of the most important specialists in fiscal policy interviewed by Wall-Street.

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