What Are The Main Causes Of Business Bankruptcy?

causes of business bankruptcy

What Are The Main Causes Of Business Bankruptcy?

By Smith & Smith & Ruiz CPA's

Businesses differ hugely in terms of the kinds of products and services they offer, but all organizations need to make sales and bring in revenue to survive & thrive in the market. When businesses are not profitable for a vast period, owners may be compelled to go into bankruptcy to leave the market or re-establish the business. While lack of profitability is the primary reason for most bankruptcies, but that is not only the sole reason that drives a business to a financial crisis many other factors can hamper a company’s capability to make a profit and lead to bankruptcy.

Below Are Some Conditions That Leads A Company To Bankruptcy:

Market Circumstances

The most common cause of bankruptcy is the poor conditions of the overall economy and the precise market in which a business operates. The economy tends to follow a crash and bust cycle of rapid growth followed by breaks. During bust periods, consumer confidence and spending see a downfall, which directly leads to low revenue. Companies of specific markets can also be liable to changes in customer choices. For instance, a small business owner that owns a clothing store will be forced to close shop if more than 70% of the customers start buying online. 


Small business primarily faces financing challenges. So they take out loans to support their finances. If a business struggles to survive in the market, its money lender may not be keen to grant additional funding, which could also lead to bankruptcy. Even if a business owner secures fair financing to keep his company afloat in the short-term, high debt makes it more challenging for a business to be thriving because it has to pay huge interest on the debt.

Those who are considering the possibility of bankruptcy in their business should seek a knowledgeable counselor for tax planning or financial planner. 

Flawed Decision Making

Poor planning and rational thinking can lead to impulsive decisions and business loss. For instance, a business owner spends money creating a product that they believe in without surveying clients and analyzing making costs to estimate whether the product could be profitable. Even if the product is valuable, it might not be financially feasible from a business perspective. Lack of education and experience in finance and administration can raise the chance of poor decisions.

Other Reasons

Bankruptcy could be a result of a host of other problems that hamper profitability. Few other factors that lead a business to go bankrupt are business location, disputes between employees, lawsuits, & maybe personal issues like sickness. Unexpected tragedies and natural calamities like floods, storms, fires, or criminal activities like theft, and fraud can also cause troubles that lead to bankruptcy.

Business bankruptcy is never a business owner’s best choice. If a business can overcome improper tax planning and shortage of finances, the owner is better off resuming to run the business until it turns out to be a profit. Otherwise, just closing the doors to the business and paying off the debts may be a better way of dealing with a troubled business.

​There are multiple grounds on why taxpayers & business owners are forced to declare bankruptcy. But sometimes proper planning, control on production cost, right investment can solve this before it becomes a serious problem.

Here at Smith & Smith, we provide a wide variety of tax & affordable accounting solutions before choosing any other alternative, Contact us to set up a consultation or visit us at our office in Arlington, Texas.

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