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BUSINESS FAILURES: THEIR CAUSES
AND MIT IGAT ION

by
GANAPATHY’AVANAN
‘---

A Thesis

Submitted to the School of Graduate Studies of Michigan
State College of Agriculture and Applied Science
in partial fulfillment of the requirements

for the degree of
MASTER OF ARTS

Department of Business Administration
1950

V'| H E515

ACKNOWLEDGMENTS

The author is deeply indebted to many members of
the faculty and fellow students, who have offered advice

and consultation during the preparation of the manuscript.

Particular mention of acknowledgment and thanks is
made to Professor Edward A. Gee, Head of the Department
05 Business Administration, who provided me with all
facilities in the department, and gave every encourage-
ment and advice in the course of this study. He also
took pains to go through the entire manuscript patiently,
and helped me to eliminate errors. It is a very bare
statement of truth, to say that without his assistance

and guidance, this work could have been delayed.

A word of appreciation is extended to Mr. Frank S.
Montgomery, Asst. Professor, Department of Business
Administration, who inspired me with his valuable sug-
gestions and criticisms, and offered his untiring cooper-

ation throughout the period of my study.

Thanks are also due to Dun and Bradstreet, Inc.,
who supplied me with their materials, and courteously

permitted me to use their data in this study.

seems

CONTENTS

CHAPTER PAGE
I Introduction ............................ 1
II Extent of Business P0pulation and
”"" Failures ------------------------------ 5
III Causes of Business Failures ------------- 24
A. Permanent - ........................ 52
B. Temporary ------§ ----- ------ ...... - 42
IV Effects of Business Failures ------------ 54
V ._Prevention -- ----------------- -----I ...... 59
VI Mitigation ------------------ - ........... 72
VII Summary --------------------------------- 94
Bibliography ............................ 98

Appendixes .............................. 102

I. INTRODUCTION

Scope and Purpose of Study:

many studies have been made in the past about
business failures and their causes, but few people try
to understand the real importance of such studies.
Business failure is an economic disease so widespread
in its effects, and so disastrous in its results that
serious effort should be directed toward the problem
of creating preventive and remedial measures. Enormous
losses are suffered by those who finance the business,
and by the consumer who shares in the tremendous economic
waste arising from business failure. Many failures can
be prevented, if the owners of active concerns will
utilize the knowledge gained from a study of the causes
of failure among other merchants. A further reduction
in business failures will result, if those expecting to
enter business are warned of the dangers and heed the

mistakes made by others.

The purposes of this study are both factual and
remedial. It is prOposed first to secure and present
statistics showing the extent of business population,
and both the extent of failures and the financial loss
resulting from such failures. The data will as far as
possible be limited to the past ten years, but more
particularly to the period following World War II.

Secondly, the causes of failures affecting business

enterprises will be examined under two heads, viz,
permanent or fundamental causes, and temporary causes.
It is felt that this examination will be necessary and
important, if effects are to be studied, and remedial
measures are to be suggested. In the third place,
attention will be directed toward the effects of failures
both upon the economy as a whole and upon the people in-
volved in business. Finally, it is hoped that, as a
result of this study, suggestions or proposals can be
made, which will stimulate efforts to reduce the numbers
of business failures, and to mitigate the financial loss

resulting from those failures.

Method of Study:

Those who deal with human relations and social con-
ditions find that the present is always rooted in the
past, and consequently believe that the future is rooted
in the present.1 This established fact suggests that, in
order to understand the problem at hand, one must probe
into_the past. The library was the laboratory for this
work. some of the factual data were gathered from the
United States Department of Commerce, and Dun and Brad-
street, Inc. The names of authors and bulletina that were

relevant to this subject and aided my task are given under

 

l. Landis, P. H. "The Growth and Decline of South Dakota
Trade Centers 1901-1953." p. 4.

the section of Bibliography. Discussions with the in-
tellectuals also helped me to clear some of the doubts

that occurred in my mind.

Definitions:

 

While most of the terms used here, are subject to
the general interpretation, the term 'business failure' is
given little explanation. There is no generally accepted

meaning to this term.

The reports of Dun and Bradstreet, Inc. indicate
that not every concern that goes out of business is a
failure. Most of the withdrawals from business are due to
changes in ownership and voluntary liquidations in which
there is no indication of loss to creditors. A business
failure involves a court proceding or voluntary action
which is likely to end in loss to creditors. withdrawals
may actually be profitable liquidations, although the
majority involve some loss of personal capital. And the
Dun's Reports often include as failures only those busi-
nesses liquidated or sold because of insolvency. Théy are

called 'commercial failures'.

Many are opposed to that narrow definition. Ulmer
asserts that "business failures, in the broad economic
sense, refer to closures attributable to the necessity
for avoiding losses. On the other hand, 'commercial

failures', as narrowly defined, usually refer to closures

which result in a known loss to creditors."1

Frequently the owner of a small establishment simply
closes up and disappears without notifying his creditors,
who divide up the remaining assets, if any, without the
assistance of an outside agency. In such cases the dis?
continued business is not recorded in the failure lists.
Furthermore, concerns that discontinue business with a
loss to owners but not to creditors are not included in
the statistics of business failures. So, Conversez and
others3 indicate their desire to enlarge the meaning of
business failures.

A business failure will mean:

a. liquidation or sale of a business while insolvent, with
a loss to creditors:

b. sale of the business because, it is Operated at a loss,
and the owner wants to salvage a part of his original
capital: or

c. lack of success in earning, what the owner considers a

satisfactory return for his services and capital.

 

l. Ulmer, M. J. "Survey of Current Business," Jan., 1947.
p. 5. l A

2. Cdnverse, P. D. & Huegy, H. W. "Elements of Marketing".
I). 5370

3. Staran, W. & Steiner, G. A. "Indiana Business Studies"
NO. 19, p. 60

Anyone quitting business for any of the above three
reasons will be a 'business failure'. Under this broader
term, every 'commercial failure' as defined by Dun and
Bradstreet, Inc., is a 'business failure': but every

'business failure! is not necessarily a 'commercial failure'.

In addition to those who fail in the above sense of
the term, many sell or close their business because of old
age, sickness, death, or a desire to retire. Not all of
those quitting business incur a loss. Business mortality
or discontinued business includes closures of all kinds
without reference to the reason for going out of business.
So, the mortality rate is the ratio of the number of son-
cerns going out of business for all reasons whatever, to

the total number of those doing business.

II. EXTENT OF BUSINESS POPULATION
AND BUSINESS FAILURES
Before going into the causes of business failures,
it is prOposed to present statistics, whowing the extent of
business population and that of failures and liabilities.

Number of firms in operation:

The available statistics from the United States
Department of Commerce give the change in American business
population during the period 1940 through 1947. (Table 1.)
Beginning with the attack on Pearl Harbor, the number of
firms in Operation in the United States declined sharply
until the end of 1945 (2.8 millions). By the end of 1946,
the business population (5.6 millions) had regained its
war time loss and exceeded its prewar peak of nearly 3.4

millions in 1941.

Underlying this unprecedented advance, which is illus-
trated in Chart 1, were the familiar characteristics of
the reconversion period -- the release ofmen from the

_ ___,' __...

armed forces, the gradual easing of material supplies for
icivilian use, rising sales in all lines, and the apparent
abundance ofprofit opportunities presented by the long-

deferred demands for the numerous commodities produced in

only limited quantities or not at all during the war

Table 1

Number of business firms in Operation, and new
and discontinued businesses. 1940 - 47.
All Industries.%
NO. of Opera- New Discont'd

Year ting Bus. Firms Business Business
(in “Owfinaw I in thousand s )(in thou tau-nab)

‘1940 3298.2 357.5 360.5
1941 3398.0 447.6 410.8
1942 3155.7 334.7 604.4
“1943 2860.6 143.4 379.1
1944 2923.5 272.8 143.5
1945 3224.1 411.8 152.5
1946 3657.8 615.3 181.7
‘1947 3848.3 409.3 218.7
Source: U. S. Department of Commerce

* "Includes all firms outside of agriculture, forestry,
fishing, and the professional services. The present Social
Security Administration industrial classification, incorpora-
ting revisions introduced since the Office Of Business
Economics series were started, is used for all industry

divisions." (Churchill, B. C. Survey of Current Business,
June, 1949. p. 19.)

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years.l Again the number Of firms in operation in 1947,
rose to more than 3,800,000: which was approximately in
line with the high level of general business activity.

New and Discontinued Business:

The wide range of the fluctuations in both the level
of discontinued businesses, and of new businesses since
1940, is illustrated in Chart 2. The sharp bulge in dis—
continuances during the war period, of course, was occa-
sioned primarily by special war time factors like scarcity
of materials and merchandise, shortage of labor, rise in
labor cost, etc.2 The spread between the high level of
discontinuance and the low level of the number of new
businesses from 1941 through 1943, indicates the magnitude
of the decline in the business population during those
years. Similarly, the magnitude of the subsequent rise
is shown by the increasing gap between the two series from
1944 to 1946, when the number of new businesses resumed
their position above discontinuances. This gap was
narrowed down in 1947, showing that the entry of new firms
was limited to 409,000, while the number of discontinuances
was increased to 218,000. Such was the extent of the

American population from 1940 to 1947.

 

1. Ulmer, M. J. "The Postwar Business Population," Survey
of Current Business. Jan., 1947. p. l.

2. Ulmer, M. J. & Nielsen, A. "Business Turnover and Causes
of Failure", Survey of Current Business. April, 1947.
p. 30

CHARTZ:

NUMBER OF NEN AND DISCONTINUED eusmcssss.

1940-1947.

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Analysis of Dun and Bradstreet's data:

'While the previous figures indicate clearly the extent
.of business population through 1947, later data from.the
source quoted, were not available for the period of this
study. So, the reports of Dun and Bradstreet, Inc. are
also analyzed to show the current extent of business
population, failures and liabilities. The data from 1939
to the first-half of 1949, are given in Table 2.

They differ from the United States Department of
Commerce in number of operating firms and discontinued
business: because the Dun and Bradstreets have their own
Reference Book for listing the concerns and rating
according to their credit and capital status. Further,
they list only 'commercial failures' as distinguished
from (business failures' in the earlier chapter. Also,
they do not include all firms as found in the Social

Security Administration industrial classification.1

Because of shortages and market conditions caused
by‘World‘War II, the business population of the country
in early 1944 (Chart 3) had dropped to its lowest level
since 1920. But, once World War II was over, Americans
began to go into business for themselves, in numbers never

before approached in the history of American business. It

 

1. Churchill, B. C. "Survey of Current Business". June,
1949. p. 19.

12

Table 2

Failure Statistics, 1939-1949*

 

 

Failure Average
Total Business Failures Rate Liability
Listed Per Per
Year Concerns Number Liabilities 10,000 Failure
1939 2,116,000 14,768 182,520,000 70 12,359
1940 2,156,000 13,619 166,684,000 63 12,239
1941 2,171,000 11,848 136,104,000 55 11,488
1942 2,152,000 9,405 100,763,000 45 10,713
1943 2,023,000 3,221 45,339,000 16 14,076
1944 1,855,000 1,222 31,660,000 7 25,908
1945 1,909,000 810 30,395,000 4 37,524
1946 2,142,000 1,130 70,349,000 5 62,256
1947 2,405,000 3,476 221,048,000 14 63,593
1948 2,550,000 5,252 310,566,000 20 59,133
1949* 2,679,000 4,581 232,635,000 34* 50,783*

Source: Dun and Bradstreet, Inc.

«- First 6 months average.

13

seems that, in 1946, the names of 647,000 new concerns

were added to the Dun and Bradstreet Reference Book, and

in the following year, 712,000 new concerns were established;
and this was at the average rate of 2,250 for every busi-

ness day.l

Increase by States:

This new business 'fever' was not centered in any one
part of the country. There was business expansion from
coast to coast, in small states, and in the larger ones,
in the farm belt, and in the large industrial centers. New
Mexico's business population increased by 88 per cent from
January, 1944 to January, 1949. In the same period, Flori-
da's Jumped by 74 per cent, Alabama's 66 per cent, Texas'
52 per cent, and California's 49 per cent. The only decline
in this five year period (1944-49), in which the business
pOpulation of the country Jumped by 34 per cent, occurred

in the District of Columbia, which had 1,500 fewer concerns
in 1949 than in 1944.

The per cent of change in business pOpulation for 1944
and 1949 by all states is shown in Appendix A.

The greatest numerical increase between 1944 and 1949
took place in New York, with a 72,000 addition to the busi-

‘ness pOpulation. California had a 62,000 increase. Other

14. IDun and Bradstreet, Inc., "A Progress Report on New
13usiness Enterprises in the U.S." p. 2.

14

large numerical gains were scored by Texas with a 46,000
increase, Ohio with 30,000, Pennsylvania with 28,000, and
Michigan with 25,000.

The reader will now turn from an examination of the
history Of the over-all business population of the countr y
during the past ten years to the report on business fail-

ures.

Failures and Liabilities:*

 

According to the Report of Dun and Bradstreet, since
1920, an average of 70 concerns out of every 10,000 in
business have failed each year. The high point occurred
in 1932, with 31,822 failures, or 154 for every 10,000
concerns in Operation with an average liability of
$29,172 per failure. The year 1939 had a normal failure
rate of 70 per 10,000, while the average liability was
$12,359 per failure. In 1942, the failure rate was declin-
ing (Chart 3) and the liability reached its lowest figures
(average of $10,713 per failure). Soon after World War II,
largely because Of the existence of a seller's market in
most lines of business, failures declined sharply. The
810 failures reported in 1945 were less than any year since
*Note on liabilities:

_The liabilities incurred in business failures represent
primarily current indebtedness, which include all accounts
and notes payable, and all Obligations, whether in secured

form or not, known to be held by banks, Officers, affiliated
companies, supplying companies or the government.

 

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1865. But from 1946 to this day, the failure rate is
again on the forward march. The rate has increased from
5 per 10,000 in 1946, to 34 per 10,000 in 1949 (which is

the average for first six months of 1949.)

Although the number Of failures that have occurred
during the past few years has been small, the average
liability per failure in 1948 was almost five times what
it was in 1940. Current high costs and prices involved
in setting up a business, and maintaining its Operation,
are greatly responsible for this marked increase in

average liabilities.1

While the failures by divisions of industry and
geographic regions for 1949, are given in Appendix B, an
illustration of failures by divisions of industry are
given below for the first half of 1949.

 

l. Dun and Bradstreet, Inc. "A Progress Report on New
Business Enterprises in the U.S." p.3.

Failures by Divisions of Industry -- June, 1949
(Current liabilities in thousands of dollars)

Number

Jan.-June, 1949'

Mining & Manufacturing

 

Mining, coal, oil, misc. 27
Food and kindred products 131

Textile mill prods. &
apparel 184

Lumber and lumber prods. 190

Paper, printing & publish-
ing 48

Chemicals & allied prods. 36
Leather & leather prods. 53
Stone, clay & glass prods. 31
Iron & steel & prods. 83
Machinery 142
Transportation equipment 41
Miscellaneous 194

Total Mining &
Manufacturing

Wholesale Trade

 

Food and farm products 155
Apparel 31
Dry goods 18

Lumber, bldg. mat'ls,
hdwe. 55

1,160

17

Liabilities
Jan.-June, 1949

3,393
9,417

9,864
11,847

4,038
861
2,179
1,650
7,491
15,926
4,119
9,129

7,402
1,282

399

2,560

79,914

Wholesale Trade - Cont.
Chemicals & drugs

Motor vehicles & auto
equip.
Miscellaneous

Total Wholesale Trade

Retail Trade

 

Food and liquor
General merchandise
Apparel & accessories

Furniture, house furn-
ishings

Lumber, bldg. mt'ls,
hdwe.

Automotive group
Eating & drinking places
Drug stores

Miscellaneous

Total Retail Trade

Construction

 

Gen'l bldg. contractors
Bldg. sub-contractors

Other contractors

Total Construction

TNumber

JarlO-June’

27

36
237

449

88-

295

245

133
207
381

228

157
225
16

559

2,080

398

1949

18

Liabilities

929

1,141
9,804

5,757
908
5,224

5,006

2,503
3,824
8,510

941
3,572

7,281
3,913
1,621

23,517

36,245

12,815

19

Number Liabilities
Jan.-June, 1949 Jan.-June, 1949

Commercial Service

Passenger & freight trans.l34 71,237
Misc. public services 9 F 4,697
Hotels 13 412
Cleaning, dyeing,

repairing 47 728
Laundries 21 695
Undertakers 5 46

Other personal services 34 481

Business & repair

.services 121 1,848
Total Commercial Service 384 ' 80,144
Total United States 4,581 232,635

Source: run and Bradstreet, Inc.

20

The largest number of failures are being reported in
the highly industrialized Middle Atlantic States -- states
of New York,‘New Jersey and Pennsylvania. But this is not
surprising since that part of the country is the most
heavily business populated region. The failure rate based
on the number of failures and business pOpulation in the
nine geographic regions Of the U. S. (See Appendix C, for
explanation of those 9 regions), was higher in the Middle
Atlantic States in 1940. The popular merchantimaagencyr
also reports that, in 1948, the westward expansion of
business reflected itself in the failure rate in that part
of that country. The Pacific Coast, comprising the states
of Washington, Oregon, and California, has the highest

failure rate.

Init ial Investment :

Because of increased operating costs, it takes much
more capital to get a business started today than it did
ten years ago. A Dun's report says that during 1945-47,
according to a Department of Commerce Survey Of 1,000 new
concerns, the average initial investment of a new retailer
going into business was $9,500. The average new wholesal-
ing business established in this same period represented
an initial investment Of $22,000.

'Naturally, the initial investment involved in setting

*Dun and Bradstreet, Inc.

21

up a business varies with the line of business. Some lines
demand larger and more expensive inventories than others.
Fixtures and the size of the outlet are other factors.
According to that study, the initial investment ragge
required was from $5,600 to start a filling station, to
over $25,000 for opening up a building materials business.
This is the main reason for increased liabilities resulting

from business failures of today.

The current increase in failures:

The current increase in failures reflects the well-
established business axiom: "Most business enterprises die
young. Less than half live to celebrate their fourth birth
day. Fewer than a third have a life span of ten years or
more. The tremendous increase in new enterprises means an
almost inevitable rise in business failures in the near

future."1

After studying the business mortality of Illinois
retail stores from 1925 to 1930, Converse came to a similiar
conclusionz, namely, that the mortality among new dealers
was much higher than among long established dealers. A
great many of the incompetent, newly established dealers
fail within a year. It appears that most of the poorly

 

1. Newsweek. May 19, 1947. p. 74.

2. Converse, P. D. ("Business Mortality of Illinois Retail
Stores from 1925 to 1930") Bulletin No. 41, p. 33.

22

prepared store owners quit by the end of the second year

following that in which they start.

How long were most of the concerns that failed in
1948 in business? After an examination of the Table 3,
it can be seen that most of them had not been in business
too long. The bulk of them, 69 percent, or 3,021 concerns
to be exact, began operating since 1945, while 89 percent
of them, or 3,897 concerns entered the business scene be-
tween 1939 and 1948. Less than one-half of one percent of
the concerns that failed in 1948 were established prior to
1900. To some extent this reflects a great degree of
soundness among the concerns, which have been in business

many years.

This study of 4,381 of the business failures, that
occurred in 1948, includes retailers, wholesalers, and

manufacturers.

It is increasingly evident, that the chance of
business failure, during the first few years of Operation,
is usually greater than after the concern has been tn
business for more than five years: because, that is the
real testing period Of the ability, stamina, and management
instinct Of the owner. In this period of relative trial

and error, the rate of mortality is greatest.

Table 3

A Study Of 4,381 Business Failures in 1948,

by Year of Establishment

23

 

Starting Starting
Year Number Percent Year ‘Number Percent

1948 212 4.8 1936 36 0.8
1947 1,017 23.3 1935 40 0.9
1946 1,183 22.0 1934 31 0.7
1945 609 13.9 1933 31 0.7
1944 327 7.5 1932 27 0.6
1943 149 3.4 1931 21 0.5
1942 106 2.4 1930 17 0.4
1941 108 2.5 1925-1929 48 1.1
1940 106 2.4 1920-1924 43 1.0
1939 80 1.8 1900-1919 64 1.5
1938 62 1.4 Before 1900 18 0.4
1939 46 1.0 Total con-

cerns 4,381 100.0
Source: Dun & Bradstreet, Inc.

24

III. CAUSES OF BUSINESS FAILURES

We have noted that the‘business pSShiééién in the
United Stateswhad inérééééd by 34 percent in 1949, over
1944 population, and that this expansionflOccurred in every
part of the country. During‘WOrld War II, the failures
were few. In 1945, only 810 failures were reported, and
this was primarily due to the existence of a seller's
market in most lines of business. In 1948, the number of
failures was 5,252: the failures mounted to 4,581 for the
first-half of 1949. The liabilities of the concerns which
failed have increased greatly. The average liability per
failure, in 1948, ($59,133) was almost five times what it
was in 1940, ($12,239).

These facts are enough to show the extent of business
failures, and to merit the serious consideration, and
appropriate action of all personsrinterested, and influen-
tial in stabilizing business units, either individally or
collectively. Now, the question arises why and how these
.failures occur. The answers will be discussed in the

following pages.
/ II]
American business consists mainly Of firms engaged

in manufacturing, wholesale trade, retail trade, construct-
ion and commercial services. Retail and small businesses
form.the major part of the number Of operating firms. So,

the failures are correspondingly numerous in this retail

25

trade group. Each industry has its own reasons for its
failure in its area. Business is so vast and varied that
it is difficult to specify the causes with any percentages
applicable to the country as a whole. Further, the owners
Of business give one opinion as to the most important cause
of failure, while the creditors rank the causes Of failures
in quite a different order. Their views and opinions are
not altogether unbiased. So, we will glance through the
opinions Of different men in this field. A study of many
failures and the reasons for their occurrences provides
facts which must necessarily be considered before preventive

and remedial measures can be formulated.

Different causes and opinions:

 

Victor Sadd and Robert T. Williams made a study1 of the
causes of failures among many different kinds of business
enterprises near Boston. The period covered was from

November 1930 to June 1931. They rank the causes as follows:

 

Percentage
of
Cause of Failure Enterprises
(owner's opinions) Affected
Business depression- . 67.7
Insufficient capital ' 48.2

Competition 37.9

 

1. Sadd, V. and Williams, R. T. "Causes of Commercial
Bankruptcies" Domestic Commerce Series No. 69. P. 14.

26

 

 

Percentage
of

Cause of Failure Enterprises

(owner's opinions); Affected
Adverse domestic and personal factors 35.1
Decline in value Of assets 31.6
Bad debt losses 29.8
Inefficient management 28.2
Excessive overhead expenses 24.0
Poor business location 14.6
Losses from speculation 11.6
Unfavorable changes in trading area 11.2
Excessive interest charges on borrowed capita1_ 11.1
TOO rapid expansion 10.5
Losses from signing notes with recourse 9.6
Buying too much on credit 9.5
Real estate losses 6.1
Lack Of adequate books 5.6
Automobile-accident losses 2.5
Failure to carry sufficient insurance 2.3
Unusual expenses 1.8
Inefficient and dishonest employees .9

Causes of Failures

(creditor's opinions)

Ine‘ic ient management 58 . 7
Dishonesty and fraud _ 33.7
Insufficient capital 32.9
Business depression 29.1

27

 

Percentage
of
Causes Of Failures Enterprises
(creditor's Opinions) Affected
Adverse domestic and personal factors 28.1
Bad debt losses 17.6
Competition 9.1
Excessive overhead 8.9
TOO rapid expansion 7.2
Defiiine in value of assets 5.8
Losses from speculation 5.8
Buying too much on credit 3.9
Poor business location 2.7
Decline in rental income 2.3
Lack of adequate books 2.1
Excessive interest charges on borrowed capital 2.1
Unfavorable charges in trading area 1.9
Signing notes with recourse 1.4
Real-estate losses 1.4
Unusual expanses 1.4
Failure to carry sufficient insurance .7
.Automobile accident Judgments .6
Inefficient and dishonest employees .6
According to their report, more than 51 percent of
f a total

the concerns had no accounting records. But 0
Of 570 bankrupts, 360 reported that they had n

any business information or advice from such 3

ct obtained

ources 88

28

credit bureaus or trade associations. In more than 68
percent of the bankrupt businesses, the owners or the

managers had not completed a high-school education.

Foulke of Dun and Bradstreet, Inc.1 writes that the
following causes are responsible for business failures:

business incompetence,

lack of net working capital,

undue extension Of credit to poor risks,

unusual competition,

physical disasters such as floods, fires, and un-
seasonable weather,

over-trading and under-trading,

personal extravagance Of partners and officers,

speculation and even that most abused of all in-
tangible impersonal reasons, "general business

conditions".

An analysis of the causes of failures Of retail drug
stores based on a study2 of 30 cases, reveals the follow-
ing causes:

1. Insufficient capital.

2. Inexperience.

3. High rent.

 

l. Foulke, R. A. "Behind the Scenes of Business" p. 65.
2. Domestic Commerce Series NO. 59. pp. 4-12. '

ll

4.

5.

6.
7.
8.
9.
10.

29

Bad business location.

Poor business management, 1.6.

a. NO adequate accounting records.

b. NO inventory or rate of turnover.

c. Misuse of place by friends.

d. Oral statements instead of written contracts.
6. Free use of money by family members.
Dishonesty.

Bad debt losses.

Business depression.

Changes in the neighborhood.

Competition and illness.

Other causes: rapid expansion, more expense, no insurance,

bad personal habits, poor personality, inefficient and

dishonest help.

The Economic Principles Commission of the National

Association of Manufacturers1 says that, unfortunately, a

substantial percentage of new business ventures do not

prove successful: and there are many reasons for this, but

among the most important may be mentioned the following:

Bad management.

Bad location.

Insufficient capital.

Poor products.

 

1. Economic Principles Commission of NAM, The American
Individual Enterprise System". Vol. I. p. 33.

30

Inefficient production.

Inefficient marketing.

Depressed business conditions.
Exorbitant labor demands.

Governmental restrictions.
International disorganization.
Attempting to cover too much territory.
Inadequate accounting.

Bad planning.

Another study made by Ulmerl in 1946 —- the period of
reconversion -- shows that 47 percent of failures were due
to scarcity of merchandise and materials, 28 percent due
to labor shortage, 16 percent due to rise in labor cost,
13 percent due to lack of customers, 12 percent due to
lack Of capital, 10 percent due to rise in rent, 8 percent
due to equipment and repair scarcity, 2 percent due to
Idecline in value of inventory, and 13 percent due to other

08.11308.

Harmon Wilson Of Southwestern Publishing Company of
Cincinnati cited the following, as causes of business
failure, when he made his speech at Michigan State College
in 1948:

 

1. Ulmer, M. J. and Nielsen, A., "Business Turnover and
Causes of Failure," Survey of Current Business, April,
1947. p. s.

31

1. Lack of capital and knowledge of how to finance
a business,

2. Inability to select the good location for business,

3. More overhead expenses, and lack of understanding
of cash versus profit,

4. Lack of knowledge of products,

5. Inability to establish satisfactory source of
supply.

6. Failure to know all things, while buying an
already established enterprise,

7. Inflated opinion of ability to operate a business,

8. Inexperience in making a market analysis to pre-
determine estimated sales and profit potentials,

9. Lack of knowledge of setting up an operating budget,

10. Lack of knowledge in handling personnel and good
public relations.

As mentioned before, these causes vary from business
to business, and from place to place. This study will not
establish any ranking of the causes of business failures
in the order of importance. The causes are more than one
for each failure. Some Of the causes are very common
factors that contribute to business failure, while some
factors'are in the main environmental, reflect the character-

istics of the current business situation' and may proximately

32

lead to failure.1 The causes are here divided into

"permanent" and "temporary" causes.

Permanent causes are those causes, which are ever
present in business, and act as the underlying cause of
failure. They will be called permanent or fundamental
causes. Temporary causes as Opposed to permanent causes
arise incidentally or gradually, stay for a temporary

period, and tOpple enterprises or hasten business failures.

A. Permanent Causes:

 

1. Inefficient Management: This means the unprofitable
and unsuccessful conduct of a business, due to lack Of
training, experience, ability, adaptation, or enterprise
of its managers. This is supposed to be the major cause
for many business failures. Many other causes can be
included under this head, because many failures could be
averted, if the management was intelligent and experienced

in making any business policy or judgment.

Inefficiency may take many forms: "bad location of
business, overbuying, poor selection Of goods, slow rate
of stock turnover, selection of incompetent employees,
inadequate supervision of employees, bad salesmanship,

poor advertising, unwise extension of credit, failure to

 

1. Ulmer, M. J. and N1e1sen,"Business Turnover and Causes
of Failure" Survey of Current Business, April, 1947.

p. 2.

33

collect accounts, failure to keep adequate records, pricing

goods too low or too high, extravagance or dishonesty."1

As Foulke Of Dun and Bradstreet says, for every busi-
ness enterprise which fails, the managements of a greater
number close up shop, lock the windows, turn out the lights,
pay the rent, liquidate their bills, and then voluntarily
move on to try their fortune at some other location, or to
become employees, until they can husband sufficient
resources to become entrepreneurs once again. Too many
persons venture into business without a true valuation of
their own abilities and a knowledge of methods required
to conduct a business profitably. Ulmer makes the state-
ment, that about 1/5 of the failures in 1946 are those of
veterans of World War II, who engaged in business upon

their return from military service.

Here it may be pointed out, that competition and
freedOm of business enterprise are foundation stones of
the present economic order. An economdc system based on
these principles is, generally, believed to be more
desirable than any alternative plan for the United States
of America. With all the numerous and far-reaching
advantages of competition and economic freedom, however,

there are certain adverse factors. One of them at the

 

l. Converse, P. D. “Should I Start My Own Business"
Special bulletin NO. 5. p. 63.

34

present time is the high mortality rate among business
organizations. Many peOple, whether qualified or un-
qualified, enter into business, when they have no other

job, and increase business failure.

The seriousness of inefficient, and therefore in-

.—>

effective, executive management of business is reflected
in the findings .r‘éafig.s‘§sis;§1...s failures. "The
concern under sound aggressive management weathers the
storm, but the one under weak, unskillful management joins

the daily Obituary list of business enterprises."1

While the government requires the lawyers, doctors,
barbers, etc., to pass examinations in the interest of
public welfare before they enter into their business,
similar examinations are not given to every business man,
although the need is both apparent and pressing to reduce
business failures and to increase the efficiency of
business men. This question of examination to every busi-

ness man will be discussed in a later chapter.

2. Bad Accounting and High Expenses:
Inadequate record-keeping is a serious factor in

business failures. Nearly two-fifths .r all firms, which

“‘1

were liquidated or sold in 1946, did not prepare annual

 

1. Foulke, R. A. "The Sinews of American Commerce" Dun &
Bradstreet, Inc. New York, 1941. P. 379.

“‘0

35

profit-and-loss statements. An annual profit-and-loss
statement, along with the running accounts of expenses,
receipts, and inventories which such a statement entails,
provides a generally recognized key to the existence of

accounting records required for efficient management.

Many business executives suffer under the load Of
high operating expenses. Major operating costs, which are
higher than the average for similar successful enterprises,
should be regarded as an indication of a likely failure.
Unless rent and salaries, usually the two largest overhead
expenses in the majority of businesses, are in proportion
to the volume Of sales, failure 13.1mminent. The profit
and loss statement reflects the efficiency of management:
and the appearance Of excessive overhead costs is an

indication of inefficient management, and possible failure.

The accounting records of a certain company1 for the

three years preceding failure reveal the following data:

 

1. source: Domestic Commerce Series NO. 69. p. 18.

1,3 '

36

 

 

Item lst 2nd 3rd
Year Year Year
Net sales $588,049.81 $593,570.69 $551,161.75

Cost of goods sold 420,197.45 391,413.42 489,964.97

 

 

 

Gross profit on .
sales 167,852.36 202,157.27 61,196.78

Operating expenses 165,588.26 164,918.61 153,358.16

 

 

 

Net profit or loss

 

 

 

on operations /2,264.10 /37,238.66 -92,161.38
Bad debt losses 1,269.18 18,006.85 12,674.92
Other adm. expenses 17,614.00 17,892.01 20,316.78
Profit or loss ~16,619.08 {1,279.80 -125,153.08
Other income 3,790.82 5,795.22 5,272.17

 

 

 

Total profit or loss-12,828.26 {5,075.02 -119,880.91

 

This record Of the company gives us an idea of how
loss is incurred by high Operating and overhead expenses,
and unwise extension of credit, although the sales were

fairly good.

3. Bad debt losses:

 

~"The entire credit system is a delicate commercial
mechanism, easily disrupted by injudicious usage. The
failure of one individual or concern to pay just debts on
the due date adversely affects, however remotely, all

members of the vast credit system."1 The consumer must

 

l. Saddland Williams, ”Causes of Commercial Bankrupties"
P020

37

pay the retailer, and the retailer must pay the whole-
saler, before the latter can pay his creditors. Upon the
soundness of credit granting by the retailers, the whole-
salers, the manufacturers or the bankers, depends the

soundness of the entire merchantile structure.

A true appraisal of ability and character is necessary
in every credit transaction. The many errors made, are
reflected in the appalling credit losses and business
failures. A bad debt loss is, usually, nothing more or
less than the result of an error in judgment. A consumer
or the Operator of a business is no longer a "mysterious
stranger" in the commercial community. Evidences Of
debtor's capacity, character and capital can be secured
from many authentic sources. The negligence of a creditor
to base credit extension on facts, systematically gathered
from all available sources may result in his own failure

and the failure of others.

Reports from 1,371 independent retail grocery stores
in Philadelphia} representing all sizes Of stores and all
sections of the city, (with total annual net sales of
$29,425,041) show that 40 percent of total sales were made
on credit. Of the total of 1,371 stores, 294 or 21.4

percent sold for cash only, and 1,077 or 78.6 percent sold

 

1. Plummer, W. C. and Ritter, P. 0. "Credit Extension and
Causes of Failure Among Philadelphia Grocers". p. 1.

38

for both cash and credit.

In this connection, sellers must bear some of the
responsibility for the failure Of their customers. High
pressure salesmanship has caused many a small retailer to
overstetk his inventory, or buy merchandise that he could
not easily dispose of. Over-liberal credit terms may
facilitate such excessive buying, and further contribute
to the accumulation of an excessive burden of liabilities.
"Of course, it is inefficient management on the part of
the store keeper, to allow himself to be oversold in this
manner. But the sellers, and the credit managers of these
sellers, who have collaborated in this overselling, can
not fairly place all the blame for subsequent failure

upon the store keeper to whose disaster they contributed."1

Liberal creditors, who are influenced in their
decisions by an insatiable desire for a larger volume of
business, actually, encourage many undeserving debtors to
accept an unwarranted amount of credit. A close analysis
of the causes of bankruptcy by Sadd and Williams, discloses
the fact that over-buying is a frequent cause. Every
debtor is confronted with the problem of accepting or
rejecting what appears to be an endless succession of

"attractive propositions" presented by persuasive salesmen

 

1. Shultz, W. J. "Credit and Collection Management". p.
471.

39

who insist that the signature to the order is all that is
necessary to complete the transaction. The inefficient
credit manager, when confronted with the debtor's order,
will probably accept the assurance of the salesman that the
account is a very desirable one which, if rejected, will

undoubtedly be accepted by competitors.

Many of the necessary factors which should be considered
in the granting of credit, are ignored to prevent the firm's
competitors from securing the order. The data collected
on the use of a credit bureau in carrying on credit business
show that, as a rule, the stores which used a credit bureau,

had fewer bad debts than those which did not.1

Another hindrance to effective credit management is
the fear of losing a debtor's goodwill, which restrains
many credit managers from making a thorough investigation
before extending credit. Most debtors, especially the poor
risks, resent a thorough investigation of their affairs and
competency, which might prove the advisability of accepting
the credit Offered by enthusiastic salesmen striging only
for larger sales commissions. Laxity in credit extension
also encourages the debtors to live beyond their means, and

tends to increase extravagance.

 

1. Plummer, W. 0. "Credit Extension and Business Fail-
ures". p. 14.

40

4. Insufficient Capital:

Closely allied to the matter of unwise extension of
credit is the fact that insufficient capital is a frequent
cause Of business failure. In other words, many concerns

attempted to do too much business on credit.

An able and ambitious business man, operating with a
moderate capital sufficient for the scope of his current
activity, foresees a larger business and greater profits,
if he expands the sc0pe of his operations. Suppose, he
does so without drawing additional capital into the busi-
ness, perhaps, by renting larger premises, perhaps, by
purchasing a larger inventory on credit terms, perhaps, by
purchasing more equipment on the instalment plan -- probably
by a combination of all three. H18 capital, which provided
an ample buffer for his previous smaller volume of Obliga-
tions, becomes too thin in proportion to the increased
volume he has assumed. Given time, his energy and ability
will produce profits which can be plowed back into the
business, and build up its capital position to a point
consonant with its enlarged scope. But such time is not
always given. Some one of his judgments may be mistaken
and involve him in a 1088 too large to be absorbed in his
new vulnerable position: or external circumstances may
operate against him, before he has had time to build up his
capital buffer. He becomes one more name in the tabulations

Of the year's business failures.

41

. Some people have their capital heavily tied up in
inventories or equipment, with a consequent shortage of

working capital. The inability to convert merchandise and

 

‘—‘*-~—-k_.. .-

receivables into cash with which to pay operating costs, and

_ ,fu._~.-_w ,— _ ~_ ‘
Mfl“ "— fl_,”____ F4“ 9......

credit obligations as they accrue, is Often the result of

 

uneconomic organization of the capital available rather than
lack of capital. Frequently a business organized without
sufficient capital, and lacking the necessary margin of

financial safety, is wiped out, when it is unable to over-

---— I‘- -W
' -~ ‘_-W ___.-.t-
7.. _._..k.——- (M _.-.—r_. --

come adverse conditions. Many concerns carry on Operations
inconsistent with their resources or prospects for profits;
and when expected sales do not materialize, a shortage of
funds results. Without adequate reserves to meet creditors'
claims, these concerns are forced to secure an extension of
credit or to liquidate their business for the benefit of
creditors. In such cases, the owners or managers, generally
state that the cause of failure was the lack of ability to

manage effectively the capital available for use.

It is worth.mentioning here to say that the Reconstruc-
tion Finance Corporation, established in 1932, has assisted
many businesses with loans. During the early and middle
1930's, this corporation provided the capital necessary
to keep many business firms in Operation. "From February 2,
1932 to December 31, 1948, the Reconstruction Finance
Corporation made disbursements of $36,406,917,400".1 It also

 

1. Craf, J. R. ”An Introduction to Business Principles and
Practices." p. 524.

42

seems desirable to start a business mostly from personal
savings and ownership contributions of shareholders rather

than by borrowing over 50 percent of the needed capital.

To sum up, the permanent causes are (1) inefficient
management, (2) bad accounting and high expenses, (3) bad
debt loss, and (4) insufficient capital. They are considered
to be very vital factors for any business man who enters
business or who is already engaged in a successful business.
If they pay more attention to avoiding these bad practices
which are fundamental causes of failure, it can be said

that the chances of failure are greatly reduced.

There are also some temporary causes which are
responsible for business failures; and they are discussed

below.

B. Temporary Causes:

Some causes of failure arise out of adverse circum-
stances and conditions, which are not possible for the
entrepreneur to foresee accurately, or cope with success-
fully. we have already pointed out that most failures are
not inevitable results of a series of external misfortunes.
And we have seen that the individual or the manager himself
has many flaws in conducting his business, and that such
flaws may be directly reSponsible for the ruin of his enter-
prise. An unfortunate event, like fire, flood and storm,

is generally the occasion rather than the cause of failure.

43

'Yet, such events are called temporary causes, because they
arise incidentally or gradually, remain for a more or less
temporary period, and operating with a force beyond the
individual's control, topple enterprises or hasten business

failures.

1. Business Depression.

Many people say that most failures are accounted for
b y thet "business depression". To understand "business
depression", we set down here a brief note on business

cycles.

Business activity in the United States is characterized
by what may be termed cycles. Economically, we move through
depression, recovery, prosperity, and recession, and then
back to depression. These cycles have been in evidence
since the establishment of the country, and are for that
matter characteristic of the economies of many other coun-

tries.

During a period Of depression, there is mass unemploy-
ment, numerous factory sites are idle, prices are low,
inventories are liquidated, morale is at low ebb, and the
government oreates employment through public works projects.
As recovery is made from a period of low business activity,
heavy industries, such as construction, steel, and cement,
begin to show increased activity, private employment begins

to pick up, public works projects are decreased, and

44

business failures decrease. During the prosperity phase

of business activity, employment increases, goods are pro-
duced in quantity, prices increase, wage demands are
numerous, profits rise, and productive facilities, particu-
larly in heavy industries, are eXpanded. SO this cycle of
prosperity continues, goods tend to be over-produced,
increased wages and costs of production continue to be
heavy, and consumer resistance to high prices finally be-
comes evident. Both industrial'and ultimate consumers tend
to become cautious, reduce purchases, and buy in more
limited quantities. As purchases at the consumer level are
slowed and as industrial users of goods and services become
cautious, inventories begin to pile up and unemployment
rises. Recession then evidences itself, and the period of

recession or crisis returns.

So, business depression is the period in the business
cycle that follows recession in the down-swing of the cycle.
It is also characterized by a maladjustment of various
economic factors. "Itis one of the truisms of the economic
world that business failures suddenly and tragically expannr
during a depression, like helium gas in a stratosphere
balloon in the warmth of the morning sun.”1 During the

Period of depression, business men must be careful in buying

—...__._

l. Foulke, R. A. "Behind the Scenes of Business." p. 138.

45

and selling goods, constantly watching the market trends
and business conditions. There will be an acid test for
the management to find the worth of its efficiency at that
time.

Many people say that most failures are caused by the
"business depression". But the cause of failure in most
cases, at that period, may not necessarily be "business
depression". During the years 1927 and 1928, a period of
boom prosperity in the Opinions of many, approximately
47,000 concerns failed with.a loss to creditors. During
1929 and 1930, a period in which the characteristics of a
depression were in evidence, slightly over 49,000 failures
were recorded by Dun and Bradstreet, Inc. These periods of
prosperity and depression fail to disclose any pronounced
difference in the number of business failures, although
some difference does exist. The large number of failures
occurring prior to 1929, must be attributed to something

other than ”business depression".

Every business failure study made in the past has
proved that other causes were more fundamental and influen-
tial than business depression. It is probably that the
larger proportion of failures results from bad judgment
8h0wn at the very inception of business. The greater number
Of enterprises, which are launched, and later fail, have no
economic justification for existence, and lack the essentials

of successful Operation. In most cases, it could hardly be

46

expected that anything short of a miracle would enable them
to avoid failure, and a temporary lull in business
activities serves only to accelerate the movement toward an

inevitable end.

The following case1 is given for further illustration

on this point:

This case involved a corporation, manufacturing dresses,
which started in business in 1923 with $11,000 paid-up
capital. In 1926, the authorized capital stock was in-
creased, and by 1927, they had $81,000 paid in. Garments
were made to sell for $16.50 to $50 a dozen, of which 60
percent was cost price, completed, and 40 percent allowed
for selling expenses. The general policy was to allow $2
to $5 a dozen for overhead. The owners of the business
claimed that business depression.was the major cause of
failure. Yet in the years 1926 to 1930, goods were fre-
quently sold below cost. An analysis of the accounting re-
cords revealed, that in 1926, net sales were $44,815, on
which a loss of $32,000 was sustained. In 1929 gross sales
were $30,415, and returns and allowances were $6,030, or 20
percent. Cost of goods sold was $24,289, selling and ad-
:ministrative expenses were $12,000. Total expenses plus

cost of goods sold were, therefore, $11,904 more than not

 

1. Sadd, V. and Williams, R. T. "Causes of Commercial
Bankruptcies." Case NO. 173. p. 19.

47

sales. The net operating loss was $14,031 for 1930, the

last year in business.

It appears that this concern operated without suffi-
cient knowledge of total operating costs, and that such costs
were greater than they should have been to allow sufficient
margin between sales and cost of sales to absorb selling
and administrative expenses, and leave a margin of net profit.
While the Officers of the corporation thought that business
depression was the principal cause of their failure, it is
Obvious that other more fundamental reasons caused the

failure.

FUrther, thebusiness failures can be reduced during
a depression if business men are educated on the different
periods of business cycles. "NO doubt cycles will have to
continue as warnings, like occasional outbreaks of typhoid
and smallpox. Alternate waves of recklessness and repent-
ence will still bring them as long as human nature remains
what it is. But if once the mass of men become cycle-
minded, just as they are already sanitation-minded, even
minor booms and dppressions will keep them alert to the

need for caution."1

2. Decline in value of assets:

The rapid decline in the values of merchandise, real

 

l. Towle, H. L. "Business Cycles and Business Men", Scrib-
ner's Magazine, June, 1936. p. 367.

48

estate, equipment, and other assets occur sometimes due to
bad business conditions and this has undoubtedly been a
contributing cause of business failures. As mentioned be-

fore, this is not a permanent cause of failure.

The decline in value Of assets has not been Offset by
a corresponding reduction in amount of liabilities accrued
against the depreciated assets, and concerns without
adequate reserves are forced to extreme measures in order
to pay creditors. Shrinking values threaten the business
structure; but if the managements build up sufficient
reserves, when the values are increasing, or allot certain
amounts every year for that purpose, failure due to decline
in value of assets can be avoided. Speculators should be

'warned of causing extreme price changes of commodities.

3. Bad location:‘

This is an important factor for most retail stores.
Considerable study has been devoted to the subject of store
location, but "the evaluation of specific locations is far
from an exact science."1 There are two aspects of store
location: (a) an analysis of the business available in the
trade area of the proposed store, by taking into account
the pOpulation, the income, habits and occupations of the

residents, and local climate; and (b) the selection of a

 

1. Converse, P. D. "Should I Start My Own Business",
Special Bulletin No. 5, p. 36.

49

specific location for the store, giving due consideration
to the type of store, traffic movement and density, parking

facilities and area of space required.

Business failure research has revealed that many
failures occur with periodic regularity in the same business
locality, and often on the same site.1 In that respect it
will be a permanent cause. A typical example is that of a
particular site in St. Louis, where three owners of a drug

store failed within a period of four years.2

But it happens that a good location turns out to be a
bad location and vice versa, due to population shifts, trans-
portation facilities, and communications. In a study of
the growth and decline of South Dakota trade centers, Lan-
dis3 points out, that the rapid growth in railroads was
reflected in the growth of trade centers; and that there
seems to have been an inverse relationship between the
development of the automobiles and improved highways. Cer-
tain institutions frequently cause trade centers to develop
beyond what would be warranted. For instance, the possession
of Michigan State College has led to the growth of a town

called East Lansing.

 

1. Domestic Commerce Series No. 59. p. 22.

2. Ibid.

3. Landis, P. H. "The Growth and Decline of South.Dakota
Trade Centers, 1901-1933“. p. 53.

 

_, ..

m a... 4V J1

50

4. Business Changes and Improvements:

To ignore business changes and improvements will lead
to business failures. In every phase of economic activity,
the process of progressive change is never-ending.- Al-
though the individual business man has little influence in
determining or controlling any or all of the many changes
taking place, he should be intelligent with.respect to them;
and particularly he.must be intelligent with respect to the
changes taking place in his own field of endeavor. In;
this modern competitive business world, new inventions,
ideas and methods are constantly being forced into use.

The methods of production and of distribution undergo frequent
revolutionary changes, and the consequent effects are dis-
astrous to many business men, who are slow to heed, and to

conform to inevitable economic transitions.

Some changes apparently have no conceivable bearing
upon the enterprises effected, and the business man must al-
wgys be alert to discern and understand the variable
factors over which he has little or no control. Certain
happenings result in price changes; some brought on by his
own actions, some brought about by the action of his
competitors; and some forced upon both.him and his competi-
tors by events that are shaped by the collective but un-
conscious efforts of all consumers. The slightest misjudg-
ment of the actual course of events often means for the

business but one outcome, failure.

51

5. Adverse Domestic and Personal Factors:

Many people say that the inability to overcome bad
personal habits is the primary cause of failure._ Extra-
vagance, intemperance, indolence, gambling, and other re-
lated habits are frequently mentioned by the debtors, as
the origin of their difficulties. In some instances,
members of the entrepreneur's family may be at fault, and

their wasteful habits will ruin the business.

The health of a business man is an important deter-
minant of his success. Prolonged sickness and accumulated
doctorflbills may cripple a successful business to failure.
It is not necessary to subject a credit applicant to a
physical examination in order to determine his credit
worthiness, but to ignore obvious evidences of long 111-

health.is to disregard an indication and warning of probable

failure.

6. Inefficient and dishonest employees:

 

Inefficiency and dishonesty of employees are responsi-
ble for numerous failures. This is because the store
personnel may-be appointed without proper selection and
training, or he may not receive enough.incentive, or he may
have some grudge against the boss, or he may have some
domestic troubles and personal worries, or even greed br
wealth. fWithdrawals of merchandise or money from the stores
by the employees have sometimes been a primary or contibut-

ing cause of failure. Employees who are discourteous and

52

inattentive to customers will cause a certain reduction in
volume of sales, and endanger the stability of the business.
Creditors, who invest money or merchandise in an establish-
ment, and fail to consider the type and character of the
employees of that establishment, neglect to heed an obvious
signal of possible failure.

V. Other Causes:

There are some other causes that put an end to business
structures. These causes can not be prevented easily, and
they arise occasionally. For instance, flood and storm do"
a great damage to merchants while the goods are in transit.
The losses due to such acts of God, and other unfortunate
events like fire, theft, riot and strike, are yeat. Al-
though it is hard to prevent such oocurrences, it is possible
to reduce the losses or compensate for losses of that nature A
by taking out an insurance policy. Most of the losses are

covered by the insurance companies.

The premature death of an enterpriser, or the retire-
ment of an experienced business man without a proper heir
to succeed his business may cause trouble to the successful
business. Here it will be desirable to hear Taussig of
Harvard University about heredity and its influence in busi-

DGSSQ

"Business leaders are recruited in the greater part from

well-to-do classes; business leaders of the present genera-

,3
1

53

tion are, for the most part, the sons of business leaders
of the preceding generation; and within this inbreeding
group of business leaders, the ownership and management of
identical business concerns are handed down from father to

son."1

No doubt, experience and heredity have great influence
in running a business successfully. But, at the same time,
it will not be impossible for the son of a laborer or
farmer to get the necessary training and run the business

gainfully o

Scarcity of materials and labor shortage will be
prominent causes during any emergency of war. These causes

forced many concerns to quit business during World War II.

Thus the temporary causes have been described here
{under different headings: (1) Business depression, (2)
Decline in value of assets, (5) Bad location, (4) Business
changes and improvements, (5) Adverse domestic and personal
factors, (6) Inefficient and dishonest employees, and (7)
Other causes. It is hOped that these causes, permanent and
temporary, described in this chapter will act as warning
signals to those business men who enter business newly or

_who are already in business.

 

l. Taussig, F. W. "American Business Leaders" p. 236.

54

IV. EFFECTS OF BUSINESS FAILURES

One may wonder what are the effects of business fail-
ures. When a business fails in a legal sense, its assets
will be sold for what they will currently bring; and the
final result of the liquidation of the enterprise is, in.
many cases, at least a partial loss of creditors' claims.
Of course, the foremost sufferer is the proprietor himself
who is deprived of an operating enterprise, and who loses
financially all or a large part of his equity. The loss to
the owner and his creditors is evident. It is true that
competition in a free enterprise system weeds out the in-
efficient and weak persons from those who are better fitted

to carry on business.

Now how does the financial loss resulting from failures
affect the economy of the country? What is the fate of
those who are thrown out of business, and how do they get
along in this world? What are the other effects? These
questions are considered while thinking of business fail-.

ure, and an attempt is made to give a few answers to them.

Economic effects:

It should be remembered that each individual is part
of the society in a country. The losses suffered by each
individual will affect the economic structure of the country

to a certain extent. The billions of dollars lost by owners

55

and creditors of failed concerns, and bankrupt individuals
form only a portion of the total resulting losses. No
representative estimate of the aggregate losses resulting
from failures can be made; yet it is evident, after a
consideration of the widespread effects on numerous groups
of individuals and the economic system in general, that such.

losses are incredibly large.

These losses are seriously detrimental to the public
interest, and to the economic welfare of the nation.
Capital is wasted in unprofitable and unsuccessful ventures
by incompetent and incapable business men. The loss of a
normal rate of interest on.wasted capital must be included
an the total waste resulting from business failures, and
this total waste certainly retards the increase of national

wealth.

Social effects:

When debts are contracted beyond ability to pay, and
later are annulled in the bankruptcy courts, it is obvious
that respect for private contract rights has been destroyed,
and that the integrity of individuals no longer assures the
payment of an honest debt. The bankrupts often lose their
friendship and goodwill from their creditors, and frequently
find no jobs with which to make their living. In many cases,
the communities in which failures occur are forced to pro-
vide food and shelter for those unable to secure employment

or assistance from other individuals. This means a social

56

burden to the community. The total income of the community
is decreased, and the collective prosperity of its inhabi-
tants is adversely affected. All failures involve losses
which, in the final analysis, are borne by the public.‘ Even
if the government spends for the protection of these un-
fortunate individuals, she spends the money collected by
way of taxes from the public.

The discontinuance of a business involves a keen hard-
ship on its employees. They are forced out of employment,
and their purchasing power is reduced. The reduction of
their purchasing power -- even if it is only temporary --
is injurious to their welfare and to the welfare of the
community in which they reside. Many are furtunate enough
to find other positions readily, if work is available.

If, however, a period of unemployment follows, the workers'
connection with a bankrupt concern often increases their
difficulty, because many wage earners have invested a portion
of their savings in the failed enterprise, and they lose fiiose
in addition to their positions. The total losses suffered

by employees can not be estimated, yet it is certain that
they are tremendous.

It should be remembered that state unemployment in-
surance provides the unemployed worker with financial help
for a given period. If the employer before becoming a bank-
rupt, had paid the taxes for unemployment insurance, the

sufferings of his employees, in case he becomes bankrupt,

Lfi'

57

would have been reduced.

Other effects:

 

It would appear, that competitors of failed establish-
ments would profit by their non-survival. On the contrary,
they may be forced to accept losses, Which, in many cases,
are sufficient to wipe out profits and threaten their own

solvency.

Suppose there are five business failures in a particu-
lar trading center, and they are settled by bankruptcy
courts. Then, the assets of these five failed concerns will
be sold at whatever prices they are able to command. In
other words, they are sold at auction. These sales, which
are being conducted in the same trading center, often in
the same block, frequently prevent the maintenance of a
necessary profit margin in an active business. Until the
merchandise of these bankrupt businesses is sold, the
active merchant must compete against the bankruptcy sales.
An auctioneer or trustee is forced by clamoring creditors
(who are eager to get at least 10 cents on every dollar due)
to dispose of merchandise at any price he can get. The
consumer naturally buys where he can obtain the best bargain,
and such bankruptcy sales are well attended. The owner of
an existing concern cannot reduce the costs of doing busi-
ness sufficiently to offset the loss of trade. His wages,
rent, and other overhead costs must be paid. It is not

unusual, therefore, for an otherwise stable business to be-

58

come insolvent after attempting to survive in a local mar-
ket demoralized by a series of bankruptcy sales at which

the buyer sets the price.

Another minor effect is also felt by some. Customers,
who were benefited by the low prices and goodwill of the
failed concern, have to find a new supplier for the goods

they need.

The reduction of national wealth, the social burden
to the community, and the plight of the employees are some
of the important effects which.will stimulate the reader to
go deep into this matter, and endeavor to study means of
preventing business failures and their bad effects on both

the community and the country.

‘I’l‘xl‘ .

. _ 11.1%.

59

V. PREVENTION

The causes of business failures are numerous, and the
effects and consequences of failures are considered to be
serious. After knowing the causes and effects, it is felt
necessary to propose some remedial measures to prevent
failures. Three alternative proposals are made, first, to
examine the people before entering business, second, to
regulate and restrict the number of people entering business,
or third, to educate the general public on good business

principles and practices.

Examinations:
In suggesting examinations for prospective business
men, a brief explanation is given as to why they should take

those examinations.

It was seen that most of the causes of failures can
be summed up in two words "Inefficient Management". Manage-
ment consists in the individual or the group of persons
who exercise leadership, and who are able to determine,
clarify and effectuate the purposes and objectives of a
particular business. It may be "administrative management"
which formulates the policy, or ”the operating management”
which.executes that policy.1 In reality no clear-cut line

of demarcation, can be drawn between those who make policies,

 

1. Peterson, E. & Plowman, E. G. "Business Organization and
Management" P. 55.

Ir.

60

and those who execute them. If the business is conducted
unprofitably and unsuccessfully by people without enough
knowledge, training, experience, and adaptability, then it

has "inefficient management".

The captain of a ship directs and manages his craft so
that it will sail well, in spite of high tides and dense
clouds on the ocean, thereby he avoids any shipwreck, and
reaches his destination successfully without damage to his
boat, men and.materials. This shows the efficiency of the
experienced captain of the ship. Similarly every business
can be run successfully, provided the entrepreneur or the
manager uses his intelligence and experience, and takes
necessary precautions, when the economic clouds cover the

business world, and cause trouble to business men.

A Russian visiting the United States was asked to com-
pare the two countries. He replied that every American ex-
pected to start a business of his own, whereas in Russia
there was no such.0pportunity. It is, of course, an exp
aggeration to say that every American expects to start a
business of his own. This just shows that the Americans
have more freedom than the Russians. But any ambitious
youth.with industry, average intelligence, and thrift can
save enough.money to start a small business; and if he has
real initiative and imagination to sell his goods and find
new methods of improving his business, and the ability to

forecast sales and price changes in the market, and to know

61

the public mind, then he can develop it into a profitable

business of considerable size.

Considering the large number of business failures and.
the short life of most business enterprises, why should
anyone aspire to start a business of his own? There are two
main reasons: First, some men crave the greater opportuni-
ties for profits and self-expression, and the satisfaction
of accomplishment which can not be found in working for
others; and they take pride in being their own bosses.
Second, if a man is out of work and unable to get a Job,

he may decide to make a job for himself.

In general, our form of government interposes no
check on persons entering business. Many unqualified per-
sons enter into business without knowing the principle of
their business. Of course, many cities require plumbers,
barbers, and electricians to know theelements of their
trade before they can obtain a license, and every state
requires doctors and lawyers to pass examinations. Examina-
tions for those desiring to enter the insurance or real
estate businesses are not new.1 They are all given in the
interest of public welfare, health and safety of the
people at large. It was pointed out in the previous chapter
that capital is being wasted by unsuccessful business men

 

l. Converse and Huegy. "The Elements of Marketing". p. 543.

62

and it also retards the national wealth. In other words,
economic health of the nation is impaired to a certain
extent, by the act of incapable persons going into busi-
ness. Examination for every business man will be a step
in the right direction, and it will have the effect of
preventing unqualified persons from entering business,
and will have the tendency of increasing the efficiency
of business men to do successful business for a consider-

able number of years.

The proposed examination will cover the elementary
principles of merchandising and accounting. This will
be held in recognized schools and colleges of the country.
Every prospective business man or executive should be
required to pass an examination of this sort given in
one of those certified institutions, before he enters
into a new business, or before he joins a business
corporation. Under this proposal, those wanting to
establish a business would have to study the elements for
business, or secure enough practical experienee to pass
the examination. It is hoped that this method will in-

crease the efficiency of business men in conducting busi-

ness and in stabilizing business units.

These tests may not necessarily be the best way to
judge the ability of an enterpriser. Besides knowledge,
one must have good health and good personality to work

and get along with peOple. He should have courage and

65

"commercial instinct", the ability to sense values and the
willingness to take chances. These traits can not be
correctly judged by holding examinations only. Experience
plus examination will hold a business man in good stead.
At the same time, it can not be denied, that holding
examinations has the merit of increasing the efficiency of
business men; and this would, to some extent, prevent
unqualified persons from entering the business and in-

creasing the death toll of business.

Government regulations:

 

A trend toward multiplying the rules and regulations
of government in a number of fields is increasing. Much
of this is inevitable. The more complicated a society
becomes, the more necessary it is that government acting
in its minimum capacity of setting the rules of the game,
must extend its field.r The game of today involves many
more peeple, md affects their interests in much more
direct ways, than in the past. Even if a government were
completely committed to the preservation of individual
liberties and individual freedom of action, it would be
necessary that the book of rules be expanded. These
facts often create a necessity of limiting the immediate
freedom of action of others. The necessity for sanitary
regulations, and the need for red and green lights on
heavy traffic roads are simple and obvious instances.

There is nothing new or startling in this. "The founding

1’-

i... . ..

.. ,....e..u91

 

64

fathers of this government recognized that liberties had
to be curtailed at some points to preserve them at other

more important points."1

An individual might have passed an examination, and
accumulated savings to start a business. Before he invests
his savings in a business, he must make a wise decision
as to what kind of business he is going to enter, why,
where and how. These are the fundamental questions raised
before starting up a new firm. A real need for his product
or service should be shown by the residents of locality
where the new firm is to be established. After the need
has been realized, the approximate cost of his product or
service should be determined to cover up his expenses.
Adding up his profit, the price should be compared with
the prevailing price in the market. The ambitious in-
dividual should also find a plausible answer to the
question, "In what way is he going to reduce his coat of
the product or improve his service when compared with his

already existing competitors?"

Without giving consideration to those facts, people
simply start a business, when they have no other work; and
they increase competition and wreck some business men.

For example, if the population of a commwnity warrants no

 

l. Griffin, C. E. "Enterprise in a Free Society" p. 267.

65

more than five eating places, the sixth entry in the same
business will be a sort of danger signal to all the owners
of eating places in that community. And a seventh entry
will hasten the failure of one or two establishments in
that locality. Unless the new firms start with adequate
funds, modern equipment, and tolerable prices, they will
die soon in the first year, or else one or two of the
already established weak and old firms are bound to quit,
because of more supply and less demand, and hence low

prices and less profits.

In order to prevent such over-supply of stores of
similar trade at one place, the government regulation is
deemed necessary. Here the government will have to do
market analysis for all trades and plan how much maximum
business is possible in each area, and then limit the
people who go into that business. As told in the previous
paragraph, the government should allow five stores at
different corners to serve the community. This kind of
government regulation will not attempt to give room for a
monopolist of any trade, but will work to improve the
business methods and to reduce business failures. It is
hoped that the government will allow the right people to
enter into the right business at the right time and place.
Regular auditing of accounts will be made by state officials,
and necessary advice and help will be forth-coming from
them to do better business.

66

While the government regulates the business, she
must encourage business research by producers, consumers,
colleges and other institutions and make the results
available to all merchants. The immediate and primary
need of business today can be met only by business research
because of the following logical reasons advaiced by
Duncan:1 _

l. The immediate and primary need of business today
is intelligent direction and control generally.

2. Intelligent direction and control of business can
be had only by a better knowledge of business
principles.

5. A better knowledge of business principles can be
derived from a careful and comprehensive survey of
business facts.

4. To secure a careful and comprehensive survey of

business facts is a problem for business research.

People may say that this kind of business regulation
by the government will not be desirable for American
economy, and it will be possible only in a society where
there is "planned economy". The suggestion of government
control is opposed to the idea of "equal opportunities to
all", and suggests the danger of "favoritism". When there

are more than five people who can run eating places in a

 

1. Duncan, C. S. "Commercial Research" p. 5.

67

community, it is pretty hard to select and allow only
five. Red-tapism and bribery may result in government
offices. Further unemployment problems will increase,
and the government will have to provide more relief to the

jobless adventurers.

Education:

 

If the people of America are so opposed to the idea
of government regulation of businesslthat they can not
ltolerate‘it to the extent indicated above, then the only
alternative is to educate the people to do intelligent
business. This is a good method to educate the people,
make them realize the loss resulting from business fail-
ures, advise them before and after entering business to
avoid failures. {If all the peOple are educated and if they
practice the principles they learned, there will be
definite reduction in the number of failures. But this
can not be achieved in a day or two. It will take some
time to educate the peOple and get the best results from

such education.

How to educate them will be another problem. Infor-
mation on business Operation should be made available to
all firms. There are several sources from which information

about organizing and managing a business can be secured.1

 

l. Converse, P. D. "Should I Start My Own Business" p. 39.

68

Many books are available, which discuss organization
and operation Of a business, handling of labor, buying and
selling goods, advertising, financing, insurance, and
credits and collections.‘ There are books on scientific
management, and on the operation of retail stores, some
dealing with the Operation of specific types of stores,
others with general problems of store layout, advertising
and salesmanship. Perhaps a local library may have such
books, or can furnish a list of suitable titles, with the
‘names and addresses of the publishers. There are also
a number of libraries Operated by large corporations,
business associations and Chambers of Commerce. They may

also be helpful.

”’Reading the entire book Of numerous pages will be a
drudgery to many people. Short but clear ideas are given
in pamphlet form. Magazines, bulletins and booklets are
;published on business practices, business conditions,
rmerchandising and advertising.’ They are issued by trade
associations, mercantile agencies, and Chambers of Comp
imerce. They come out weekly, bi-monthly or monthly. One
vdio reads them regularly and carefully with reference to
current happenings of the business world will learn much
about the Operations of businesses in their own fields of

interest.

I Another source which should not be overlooked is a

state university or some other large university or college

69

which Offers courses in businesS¢' Many such schools have
bureaus of business research, which publish their results
Of studies designed to help business men with their prob-
lems. They may also be able to furnish supplementary
information or to refer inquiries to important sources.
Panel meetings and discussion groups Of similar tradesmen
or the conference of teachers and executives of business
will help to exchange ideas and discuss problems which are

difficult to solve by individuals.

The Bureau of Foreign and Domestic Commerce, a sub-
division of the United States Department of Commerce
(Washington), provides much valuable service to present
and prospective business men. This bureau has prepared
many manuals designed to help persons, who wish to start
various types of business and those who have already
started Operating businesses. It is also ready to give
much additional helpful information, including the names
of associations in the various trades. The Field Service
Office Of the Bureau, located in principal cities, may
be able to supply published information, direct inquirers
‘to available data, or give personal advice and helpful

suggestions .

Many banks and insurance companies give valuable
advice to business men. The service bureau of the Metro-
politan Life Insurance Company cooperates with many business

concerns and trade associations in making available infor-

7O

mation on accident prevention, budgetary control, better
accounting methods, new products, sales outlets and many
other matters. A banker may Often, from experience with
other business men, make suggestions that will be very

worth while in financing and starting a business.

Most of the leading daily newspapers in the country
pay considerable attention to the business section, and
provide current information of interest. If people are
tired of reading papers and writing accounts, and if they
do not want to strain their eyes any more, they can listen
to the radio. Radio broadcasting will be a useful means
of educating the public, in the matter Of business trends,
business practicesJilnnaCrl'ket quotations. PeOple should be

educated first to know the various sources of information

and the services Offered by different institutions.

It will be of interest to many, if films are taken
‘to show the Operation of a good business for the use of
students and business men who are anxious to know and
Ilearn about modern business. Television has come to help

113 in visual aid programs.

There are many methods and sources to educate people.
Reading books, bulletins, magazines and pamphlets by

Vfiisiting libraries or buying them from.publishers will be
one method. Going to schools, taking part in discussions

and business exchange meetings will be another method.

71

The various service bureaus of the government and private
institutions are ready to Offer their advice and consulta-
tion. Radio braodcasting and visual-aid programs could be
increased to educate the people. If the people follow any
one Of the methods to suit their taste, and make use of
all the available facts and facilities, the result would
be steady decrease in the number of business failures.

It will be of immense help for any prospective business
man to receive the necessary education and training before

he enters a business.

72

VI. MITIGATION

SO far, the discussion was centered at preventing or
reducing the number of business failures. Three proposals
were made -- to hold examinations, to regulate and control
business, and to educate the people. Education seems to
be desirable to foster the free American enterprise system.
Now, the attention will be directed towards mitigating the

financial losses resulting from business failures.

However much one may try to run a successful business
and avoid business failures, there are always some failures
due to one reason or many as mentioned befOre. 'Ih 1945,
the total number Of failures was only 810, but with a
total liability Of $30,395,000. These failures are those
with known loss to creditors. A11 failures do not result
in heavy losses; because some personsquit business losing
part of their capital but without any loss to creditors;
and some quit while their business still shows a profit,
but not a satisfactory profit as he expected.

I!

It was found that some businesses fail due to fire,
flood, etc. and result in heavy losses. Businesses as well
as individuals are confronted with a variety of risks,
many of which are inaurable and some Of which are not. The
hazards confronting the business men, whether manufacturer,
wholesaler, or retailer surmount in sOOpe those of ordinary

individuals. His investment in property, such as building,

75

fixtures, merchandise, and delivery equipment, constitutes
a considerable portion of the assets of the business and
must be protected against fire, flood, theft, windstorm
and other similar risks. The business may be sued for
damages; because a delivery truck injured a person or
prOperty; the product injured a customer; a customer or an
employee was injured on the premises; or for other reasons.
The business is crippled and loss is increased due to a
variety Of these risks. Most of these business losses can
be indemnified by taking the necessary insurance policy
and paying the premiums regularly.

Some of the important insurance policies for a
business man are briefly explained. More details of these
policies are not given in this study, because it will take

time and form a separate problem by itself.

Fire Insurance:

The most common risk faced by every business man is
fire. In Spite of the best precautions which may be taken
to reduce the fire hazard on one's property, a conflagration
arising in adjoining land or buildings may affect the owner's
property, bring the roofing of his building to the ground
level, and burn it to ashes. Incendiarism and carelessness
are constant sources of trouble and are responsible in set-
ting ablaze many beautiful buildings and property in this

modern electric age.

74

SO, a standard fire insurance policy is necessary for
every business man and it protects the owner of buildings,
fixtures and merchandise against loss by fire. Some items
like currency, securities, deeds, and notes receivables are
not, generally, insured under the standard fire insurance
contract. Losses or damages directly or indirectly result-
ing from invasion, riot, or civil commotion are also not
included. But, these risks may be covered by special en-
dorsements added to the standard fire insurance contract.
The standard fire insurance contract protects the owner of
the property to the extent of actual cash value Of the
property at the time of loss; and it will not be more than
the amount it would cost to repair or replace the property
with.material of like kind and quality within a reasonable

period of time.

Automobile Insurance:

Equally important as fire insurance is the automobile
insurance. NO country in the world, except the United
States of America, has expanded her transportation facili-
ties with automobiles Of different varieties. Because of
rapid rise of vehicular transportation, the risks arising
from the Operation of motor vehicles are increasing, and
owners and.Operators have sought insurance protection on
a large scale. There are several types of automobile in-
surance, and each type serves a particular purpose, and
covers a particular hazard which the owner of the vehicle

faces. The several types are bodily injury liability,

75

property damage liability, medical payment coverage, fire
and theft, and collision. Most companies now write a
"comprehensive fire and theft policy” which provides against
bodily injury liability, prOperty damage, fire and theft,
flood, windstorm and glass breakage.

Robbery and Burglagy Insurance:

Another hazard confronting the business man is the
loss of prOperty by burglary or robbery. There is a
technical difference between these terms. Robbery is the
felonious taking of personal property in the possession
of another, from his person or immediate presence and
against his will, accompanied by means of force or intimi-
dation. Burglary means the taking Of prOperty by felonious
entry into any house, shOp, warehouse, store, mill, rail-
road car or vessel by force or violence when the premises

are not open for business.

The insurance company writing a burglary or robbery
policy reserves the right to inspect the insured's premises
at reasonable times, and advises the insured to maintain
a burglar alarm, a modern safe, and other devices which
will prevent or reduce losses. When the prOperty is pro-
tected by some or all of these devices, a reduction in the
insurance rate is granted. There are many kinds of burglary
and robbery insurance like personal hold-up insurance, safe-
deposit box insurance, and paymaster robbery insurance.

Besides, theft and larceny policies are written by insurance

76

companies to protect business men and householders against
appropriation of property by employees, servants, or others

having access to it.

Business Interruption Insurance:

 

While the fire insurance policy covers only financial
loss due to the value of physical property destroyed, it
does not cover the loss resulting from interruption of
business or manufacture due to the same peril. If a real
unforeseen loss is sustained in this way, it is a proper
subject for insurance. In recent years, this has been
recognized, and coverage for losses from interruption of

business is offered,

When the business has been interrupted by fire, and
it is impossible to occupy and use the premises, certain
expenses such as bond interest, the eXpense of keeping a
staff together, and some advertising expenses continue and
must be paid. Such loss is known as "business interruption
loss". It was formerly termed a "use-and—occupancy" loss,
since it comes from the inability to occupy and use the
premises.1 The business interruption insurance enables
the business man, whether he is a manufacturer, wholesaler,
retailer or professional man, to pay charges which continue

during the period in which the business is inoperative.

 

l. Mowbray, A. H. "Insurance" p. 95.

77

Life Insurance:

 

Many businesses operate in such a manner that certain
individuals in a company are responsible for a great portion
of the business transactions. Stockholders are now realiz-
ing more and more that management is one of their valuable
assets. The loss of those "key men" in an organization
may result in a loss of business and a decline in profits.
Fer this reason, many corporations now buy life insurance
on their top executives of high caliber and value, and in
the event of their death, the proceeds of the life insurance
policies compensate in some measure for the loss of business.
Life insurance is also used in the liquidation of partner-

ship interests.

Other FOrms of Business Insurance:

Goods or commodities in transit by rail, truck, plane,
or ship are subject to risks. So business men can avail
themselves of transit insurance, and in the event of loss
and damage of goods or commodities in transit, the insurer

pays the claim promptly.

There is the employee liability insurance. Accidents
on the job are one of the hazards faced by employees, and
the employer must insure against injury or death to his
employees by subscribing to an industrial compensation

fund or to an insurance plan with a stock or mutual company.

Surety and fidelity bonds can be taken by a business

78

man to insure against dishonesty or violation of trust by

his employees.

There are several risks which can not be insured.
These include shifts in business location, shifts in con-
sumer demand, the development of new products, price
changes, and changes in public opinion. By constant re-
search and by keeping good relations with the public and
the employees, an alert management will not lose much, but
can take necessary precautions to reduce losses resulting
from such risks. It should also be remembered that only
for taking such risks, the entrepreneur is entitled for
profit. However, there is another risk that could be
insured, and that is the credit risk. The theory and
advisability of credit insurance are considered in the
following few pages.

Credit Insurance:
The present business failures are increasing in number

and the liabilities are also increasing. The average

Ifléfi

U

liability par failure in-'§¥8 was'almoet~five times what
it was in 9:6.) Current high costs and prices are attribu-
'ted to be reasons for this high liability. Besides, the
Inagnitude of credit in modern mercantile business is large.
In view of the fact that business failures are inevitable,

'there will always be credit losses.

There are so many factors affecting business man and

79

his profits. But all of them are not controllable ordinari-
ly. If the factors impairing profits are within the
business organization, they can, generally, be controlled.
Sometimes, however, the causes are outside the business
organization and Offer many difficulties. "Protection is
necessary in such cases in order to maintain the profits of
the business on an adequate basis, and to prevent any

sudden changes in the financial status."

 

The Principle of Risk:

I In the case of life insurance, the actuaries have es-
tablished, on the basis of mortality tables, that a certain
percentage of men of a given age will die in the current
year, that the percentage will be still larger for men a
year older, larger yet for men two years Older, and so on.
The chance, that any particular individual will die in the
current year can not be determined. But conclusions as to
the group rest on the firm foundation of probability mathe-
:matics. The insurance company can establish a premium rate
.for the group that will yield a predictable net profit on
insurance taken out by the group, despite the unpredictabi-
ility Of the individual members of the group. The same

‘principle is applied in other insurance fields.

Similarly, credit analysis of a seller's individual

___

l. Ackerman, S. B. &'Neuner, J. J. "Credit Insurance".
p. 2 '

80

customers can not determine which of them, over any period
of time, will certainly involve the seller in bad debt
losses, and which will pay, promptly or laggardly, all
their obligations in full. Like insurance policy holders,

credit customers fall into risk groups.

The credit rating classes established by Dun and Brad-
street, and by the special line agencies that make ratings
provide a crude but workable classification of customers
into risk categories. The credit worth of individuals can
be known from local attorneys and bankers. The credit man
must have all possible information: and he can determine
good and bad risks individually for his own company by
keeping record of his accounts, and possibly annual sales
to them, and of the number and possibly amount of badciebt
losses, and make an estimate of possible normal bad debt

losses.

The over-all loss for each group may be predetermined‘
with some degree of accuracy, though by no means with the
mathematical precision possible to insurance actuaries.
For each individual customer in a risk category, however,
there is only a relative probability of loss that may be
anticipated from his group.

‘Nature of Credit Insurance:
If the credit man makes an estimate of normal bad debt

losses of his company, provision can be made for covering

81

them into accounting and budgetary procedure, by treating

them as a special type Of operating expense, or by absorb-

ing through a bad debt reserve. Yet, the loss increases

during bad times and such abnormal loss is Often unforeseen,

and appreciably reduces the profits. It is hard to antici-

pate the following events:

A.

A selling firm may have one or more large customers
who form the greater portion of the selling firmfis
total receivables. If these one or more large
customers become insolvent, it will create an ab-
normal loss to the seller.

A good proportion of the customers may be engaged

in the same kind of business, and if their business
is affected by some unusual event like a technologi-
cal development, a long strike or raw material
shortage, then these customers may be forced to
become bankrupts, and they can not pay their accounts
to the seller.

A substantial proportion of a firm's customers may
be located in one area, which is hard hit by some
unusual regional occurrence like flood, crop failure
or long-continued strike in an industry. Then those
customers may become insolvent, and will be unable
to pay the accounts to the selling firm.

A general business depression may make many small
business men insolvent, and prevent them from clear-

ing their debts to their suppliers.

82

An individual selling firm can not generqdly anticipate
the above losses, and it is very difficult to make pro-
vision for absorbing such losses, without severe financial
dislocation. These abnormal bad debt losses can, however,
be averaged out for large aggregates of sellers with custom-
ers in all lines of business, and located in all parts of
the country over a period of time. This is done bytzredit

insurance companies.

Losses Insured:

 

Credit insurance covers bad debt losses releting
from the insolvency or delinquency of customers. Accord-
ing to the policy forms current in 1946, such insolvency
is deemed to occur, when:

l. A debtor shall have absconded;

2. A sole debtor shall have died;

3. A sole debtor shall have been adjudged insane;

4. A receiver shall have been appointed for a debtor;

5. A debtor shall have transferred or sold his stock
in trade in bulk:

6. A writ of attachment or execution shall have been
levied On a debtor's stock in trade and said stock
sold there under, or the writ returned unsatisfied.

7. A debtor shall have made a general offer of compro-
mise to his creditors for less than his indebted-
ness.

8. There shall have been a recording of, or taking

83

possession, under a chattel mortgage given by a
debtor on his stock in trade:

9. A debtor's business shall have been assigned to -
or taken over by a committee, appointed by a
majority in number and amount of his creditors;

10. There shall have been a recording of, or taking
possession under, an assignment or a deed of trust
made by a debtor for the benefit Of his creditors;

11. A voluntary or involuntary proceeding shall have
been instituted to adjudicate a debtor bankrupt;
or

12. A proceeding for the relief of a debtor shall have

been instituted in a Court of Bankruptcy.

Delinquency of an account is covered, when the insured
seller, under a mandatory or optional policy provision,
files such account with the insurance company for collection.
The indemnified shall file for collection within ninety
(90) days after the account has become past due. The in-
surance company will take rigorous steps to collect that
account. In case of insolvency, the indemnified shall
file claims within twenty (20) days after acquiring know-
ledge of a debtor's insolvency, as defined above. The
period usually covered is 12 months, and the policy is
renewable after the period of expiration. This insurance
will cover all of one firm's accounts under a general cover-

age policy; and will cover only certain specified accounts

84

under specific risk policy.

Premium Rates:

 

"The basic factor in determining premium rates for
general coverage is the stipulated individual account
coverage on accounts of customers in the various rating
classes."1 Dun and Bradstreet's rating of individuals is
considered in calculating the premium rates for general
coverage policies. The rate varies from $4 for 1,000 for
the best risk to $30 for 1,000 for the poorest risk. The
sum of these premiums calculated on stipulated account
coverages of a policy will form.the total basic premium
on a general coverage policy. “No studies have been pub-
lished on the costs of different kinds of credit insurance

in relation to insured saLes."2

Under a general coverage policy, the premium rate will
be low: but it does not cover any and all bad debt losses
that a seller may sustain as a result of sales made during
the policy period. Only excessive losses over the normal
loss from the insured accounts are covered. Years may go
by without payment to the insured, or payments during that
period may be less than premiums paid to the insurance '

company.

 

l. Shultz, W. J. "Credits and Collection Management".
p. 570. '
2. Ibid.

85

Under a specific risk policy, the premium rate is no
doubt high; and therefore that policy covers fully costs

on any losses sustained on the account or accounts insured.

Merits of Credit Insurance:

 

"The advantage of credit insurance is the prevention
of undue expansion of credit, thereby avoiding unnecessary
credit losses, decreasing the number of business failures,
and tending to alleviate the effects of severe panics and

crises."1

Credit insurance is intended primarily as protection
against the exceptional bad debt losses that might other-

wise be crippling.

When a single large customer suffers a business
failure, and is unable to pay his debts to the seller,
credit insurance gives protection to the seller against un-

usual bad debt loss.

When a group of customers located in a region is
affected by some regional catastrophe, the seller is re-
lieved of his abnormal bad debt losses from that group of

customers.

When a group of customers belong to the same line of

 

l. Ackner, S. B. and Neuner, J. J. "Credit Insurance".
p. 240

86

business, and their business is affected by some disaster
peculiar to such line of business, then the credit insurance
gives protection to the seller, and prevents him from

serious bad debt loss.

When a sharp business depression arises, many customp
er's of a firm are affected and they are unable to pay
their accounts to the seller. The primary advantage Of
credit insurance is realized by seller and creditors at

that time.

If a delinquent insured account is turned over to the
insurance company within 90 days after it becomes past due,
the insurance company may be able to take more aggressive
and effective action for collection than the creditor.

The chances of collecting the account are greatly increased.
Before submitting the customer's account to the insurance
company, the creditor can send a diplomatic letter to the
customer explaining the contract with the insurance company;
and this letter may have some effect,and help the creditor
to collect his dues. Every care should be taken in writing
that letter, in order that no loss of customer goodwill
results. If this letter of collection appeal proves no
desired results, his account can be filed with the insurance
company for aggressive collection. No matter the customer
goodwill is lost now, because that customer will not then

be considered a good account. This collection provision

87

may tend to increase the efficiency of the credit collection

department of the seller.

Another incidental advantage is that this insurance
makes the seller review his accounts and ratings, and spot
the good risks. Hence, he will be able to sell more to
good credit risks, less to bad accounts, and restrict sales

to very poor risks.

Defects:

The payment of prendums on a credit insurance policy
will certainly swell the business cost. The result of
it will be, either the prices of the seller's goods will
be enhanced, or his profits will be reduced. This is not
peculiar to credit insurance. If the protection afforded
against unexpected bad debt loss is worth this cost, then
nobody will call it a defect of credit insurance. The same
is true of all insurances like fire insurance, liability

insurance where premiums are paid regularly.

The credit insurance may create the tendency in some
credit departments to rely upon the insurance policy for
their credit decisions, and they may not use their
considered judgments. The ratings of mercantile credit
agencies are a valuable guide to know the credit risk
status of customers, and this forms the basis for credit
insurance. This is only a guide, but not a substitute for
detailed inquiry and careful analysis. If an account can

be covered by insurance up to the maximum for its risk class,

88

a credit man may be tempted to reduce his labors by
arbitrarily using such coverage as the account's credit
limit. He then blindly approves all orders within the
credit limit, and just as blindly refuses to check orders
in excess of the limit. This may result in more bad debt
losses, and the insurance company will pay less by way of
compensation or charge high premium rates. The blind re-
fusal to check orders above the policy maximum may often
bring some undesirable conseqiences. Good business might
be turned down and some good customers will not have any
dealings with such a seller and finally the sales volume

will go down.

It should be remembered here, that fire insurance,
liability insurance or any other form of business insur-
ance can have the effect of causing the insured enterprise
to relax precautions. How many industries are there without
adequate fire and safety precautions after being insured
for fire and burglary? Most of the insurance companies
see that the policy hOlder takes necessary precautions, and
follow their rules to reduce the loss resulting from any
risk on which they give coverage. Failure to comply with
those rules will result in cancellation of their policy.
Similarly, the credit insurance companies endeavor to
impress upon their policy holders that their policies are
no substitute for careful credit analysis and effective

collection procedures. Every modern business man should

89

now realize the importance of credit insurance, and give

his full support to such a policy.

Comprehensive Business Insurance Policy:

 

In view of the increasing number of business failures,
and of the losses resulting from them, we have endeavored
to point out the various causes of failure, and to suggest
preventive methods. We proposed examination, regulation
or education by which the business men could be aided in
reducing the number of business failures. Finally, in order
to reduce or mitigate the financial loss of failures which
result from insurable risks, we have suggested various

insurance policies.

The nature of risks faced by modern business is ex-
tensive and complex. Business men must purchase various
types of insurance to enjoy the protection against possible
failure and damages. Fire, automobile, robbery and burglary,
business interruption, life insurance on executives, transit
and liability insurances, surety and fidelity bonds, and
finally credit insurance -- these are necessary for business
men, and the number Of these policies by the enterpriser
will vary according to the type of business he is in. At
present, credit insurance is issued to jobbers, wholesalers,
manufacturers and very infrequently to retailers; and the
great majority of business men continue to rely on their own

credit men and on reserves to safeguard against excessive

,, p.

 

ill-II

90

bad debt losses, because it is felt that the premiums on
credit insurance are high, and the coverage is limited and

intangible.

There is a growing tendency in the business insurance
field to subscribe to comprehensive policies which insure
the business man against all basic risks, including credit
risk. The comprehensive policy represents the most modern
type of insurance in the fields of automobile and liabili-
ty.1 This kind of comprehensive policy should be issued
to business men giving protection against all insurable
business risks. The comprehensive policy for a business
man arises out of the defects of the separate policy
system. The defects are: (l) the insured endeavors tO
save money by buying only certain selected coverages, and
thus is Often inadequately insured; (2) rates are higher
than would otherwise have been necessary because persons
buy insurance only in those fields in which they are afraid
that losses would be experienced -- a process of adverse
selection; (3) the insureds who desire complete protection
might have bought numerous policies, and still have been
without assurance that all the hazards were covered; (4) it
requires an expert to tell the insured what policies he

needs, and inconvenience is experienced in handling them.

 

l. Riegel, R. and Miller, J. S. "Insurauce Principles and
Practices.” p. 608 & 637.

91

Business Insurance Companies:

 

Therefore it is highly desirable to start business
insurance companies, which will issue comprehensive
business policies providing a broad coverage, and affording
a more thorough coverage than do separate policies written
on specific hazards. The government may direct the leading
insurance companies to cooperate in this matter and issue
a comprehensive business policy which will give full pro-
tection against insurable business risks. Such business
insurance companies will require the insured to submit
monthly profit and loss statements which will be carefully
and cenfidentially scrutinized by their special auditing
departments, and necessary corrections and sound advice for
improvement will be made by the business insurance compan-
ies. This auditing department will also serve as a
counseling center for the needly business men. There should
be a business information section to give all possible in-
formation and help to business men in any matter concerning
their respective lines of trade. Inquirers may be helped

directly, or they may be referred to prOper sources.

These businessfinsurance companies will be run by
private enterprisers, but they will be subject to state
supervision. The complexity of modern economic life is
increasing and the public tends to delegate to the state
the investigation of those with whom it does business;

the language of insurance and its processes are of a techni-

92

cal nature and require study and experience, if they are to
be clearly understood from the insurance contracts. Abuses
by private companies could be checked by state regulations

and supervision. Hence, it is suggested that these business

insurance companies will be under state supervision.

The state commissioners will extend their jurisdiction
over business insurance companies. The rates for this
comprehensive policy should be approved by the commissioners
or the committee of experts appointed by the commissioner.
Difficulty in making rates or problems affecting the
country as a whole can be brought by state commissioners
to the notice of the National Association of Insurance
Commissioners, which is composed of the insurance commision-

ers of all states.

Compulsory versus Voluntary Comprehensive Business Insurance:

 

It is hOped that, if every business man is required to
buy a comprehensive business insurance policy, business
risks will be distributed to all business men, and premium
rates will be less for adequate protection. Further the
insurance companies themselves will endeavor to improve the
'general business standard by giving all information and ad-
vice to business men. It is worth.mentioning here that the
Federal Deposit Insurance Corporation has helped to prevent
bank failures in the United States, and to create public
goodwill toward their banks. But the membership is not

93

compulsory.

Many people may say that business in the United States
is not too bad to force any insurance, and if the people are
opposed to the idea of compulsory insurance on the plea that
their freedom is being encroached upon, then the only course
left Open is to sell the idea of business insurance to as
large a segment of business enterprisers as possible. Of
course, the selling cost will increase the insurance rate,
and if the freedom loving people do not mind paying that
selling cost, efficient salesmanship could be used for the

prOpagation of comprehensive business insurance policies.

If and as the practice of business insurance expands,
it may be anticipated that the business insurance companies
of this type in all states will become leaders in a move-
ment to educate the people in better business principles
and practices. The ultimate result will be that the Amer-
ican business health will tend to improve, the number of
business failures will be low, and the loss resulting from
any such failure will be far less damaging to the economy

as a whole.

94

VII. SUMMARY

This study of business failures was undertaken with
the main purpose of analyzing the different causes of
business failures, in order to stimulate efforts toward
reduction of business failures, and toward mitigation of
the financial loss resulting from such failures. The
analysis of this study reveals (l) the extent of business
population and failures in the United States, (2) the
causes of failures -- permanent and temporary, (3) the
effects of business failures, (4) prOposals for prevention,

and (5) suggestions to mitigate the financial loss.

‘The extent of busines pOpulation in the United States,
is expanding in everyjpact of the country, except the
District of Columbia, according the the Reports of Dun and
Bradstreet, Inc., prepared in 1949, Between the years
1946 and 1949, the business pOpulation of the country has
jumped by 34 per cent, the high increase being in.New York
and California. The failure rate in 1945 reached its
lowest level since 1865 with only 4 failures per 10,000
of the total business population, largely because of the
(existence Of‘a seller's market; but the liability was not
the lowest in that year. JCurrent high costs and prices
involved in setting up a business and maintaining its opera-
tion are greatly responsible for the marked increase in

average liabilities today. The average liability per

4'51???

”\

95

failure, in I9483was almost five times what it was in
1645;; The number of failures is increasing, too. It is
also pointed out, that the chance of business failure
during the first few years of Operation is, usually,
greater than after the concern has been in business for

more than five years.

The opinions and ideas of different men are briefly
given on the causes of business failure in different lines,
and at different periods. Then, the causes are divided
into permanent causes and temporary causes. Permanent
causes are those causes which are ever present in business,
and act as the fundamental cause to failure. Under this
heading, (a) inefficient management, (b) poor accounting
and high expenses, (c)—badedebtwlossee, and (d) insufficient
capital are examined and considered to be vital causes of

failure.

Temporary causes, as opposed to permanent causes,
arise incidentally, stay for a temporary period, and topple
enterprises, or hasten business failures. They are (a)
business depression, (b) decline in value of an asset, (c)

bad location, (d) business changes and improvements, (e)
adverse domestic and personal factors, (f) inefficient and
dishonest employees, and other causes. They have been
discussed at considerable length, so that all persons in-

terested and influential in stabilizing business, may take

96

appropriate action to avoid those errors in the future.

Some of the economic effects of business failures are
that many creditors are unable to realize the full value of
their extended credits, capital which is wasted by incapable
business men, and the normal rate of interest on this
wasted capital, reduce the national wealth of a country.
Social effects are, that the owner loses his integrity and
the community may bear the burden of supporting a bankrupt,
and his employees who are thrown out of work. Further, the
competitors of failed estaalishments may suffer losses,

when the assets of failed concerns are sold at auction.

”,eWhile proposing preventive measures to reduce business
failures, it is said that the majority of failures can be
averted, if the management was intelligent, experienced,
and efficient. To check unqualified persons entering
into business, examinations and the issue of dealer's
license are suggested. The government can step in and
extend their rules and regulations to prevent the excessive
number of persons entering into the same line of business
at one place. This may lead to planned economy and govern-
ment regimentation which will be against the American Free
Enterprise System. SO, an alternative suggestion is made
to educate the people by various means to do better busi-

11638.

Finally, various insurance policies are taken into

_.

 

97

account to mitigate the financial losses that affect a
business man unusually to cause failure. The advisability
of credit insurance is also considered at the end. Of
course, the business men of today are confronted with many
a hazard, and they have to purchase various types of insur-

ance to enjoy protection against possible failure and

a .. ‘u'
v

damages.

It seems desirable to start business insurance
companies with the purpose of issuing a comprehensive H
business insurance policy providing a broad coverage, and
affording a more thorough coverage than do separate policies
written on specific hazards. These companies will be under
state supervision, and the rates are to be approved by the
State Commissioners. They will also help the business men
by giving information and adfiice on modern business
principles and practices. By such services, it may be
anticipated that these business insurance companies will
become leaders in a movementtn educate the people in doing
better business, with the ultimate result of increasing the
American business life, reducing the number of business
failures, and keeping the financial loss resulting from any

such failure as low as possible.

98

BIBLIOGRAPHY

Ackerman, S. B., and'Neuner, J. J.

1924 "Credit Insurance" ch. 1-2, The Ronald Press
Company, New York.

Churchill, B. C.

1949 "Statistical Series", Survey of Current Business,
June, 1949. U. S. Department of Commerce, Wash-
ington, D. C.

Converse, Paul D.

1952 "Business Mortality of Illinois Retail Stores from
1925 to 1930," Bulletin No. 41, University of
Illinois, Bureau of Business Research, Urbana.

1945 "Should I Start My Own Business," Special Bulletin
No. 5, Uhiversity of Illinois, Bureau of Business
Research, Urbana.

Converse, P. D., and Huegy, H. W.
1947 "The Elements of Marketing" p. 537-44. Prentice-
Hall, Inc., New‘York. _

Craf, John R.

1949 "An Introduction to Business Principles and Prac-
tices" ch. 11-13. Harper and Brothers, New York.

‘

Dun and Bradstreet, Inc.

1949 "A Progress Report on New Business Enterprises in
.the U.S."
---- "Business Longevity in the U.S. - 1939"
g;¢L--- "Commercial Failures in the U.S., 1857 through 1949"*

*first half of 1949.

99

Dun and Bradstreet, Inc.

1949 ”Failures by Divisions of Industry and by Geogra-
phic Regions - 1948"

---- "Growth in Manufacturing by States, 1959-1947"

Duncan, C. S.

1922 "Commercial Research" ch. 1-12. The Macmillan
Company, New York.

Economic Principles Commission of N.A.M.

1946 ”The American Individual Enterprise System” Vol.
I, ch. 1-3. McGraw-Hill Book Company, New York.

Fou1ke, Roy A.

1936 ”Behind the Scense of Business" ch. 1-6. Dun
and Bradstreet, Inc., New York.

Frowman, Lewis A.

1948 ”Introduction to Business" ch. 4. Richard D.

Griffin, Clare E.

1949 ”Enterprise In A Free Society" ch. 15. Richard

D. II’Win, InCO, Chicago.

Hicks, W. T., and Crowder, W. F.

1945 "Small Retail Store Mortality”, Economic Series
No. 22. U. S. Department of Commerce, thhington,
D. C.

Huebner, S. S.

1938 "Property Insurance" ch. 37. D. Appleton-Century,
New York 0

100

Hutchinson, R. G. et a1

1958 "A Study in Business Mortality" American Economic
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Kulp’ CO A.

1942 "Casualty Insurance" ch. 14. The Ronald Press

Company, New'York.

Landis, Paul H.

1953

"The Growth and Decline of South.Dakota Trade
Centers, 1901-1955" Bulletin No. 279. April,
1955. South Dakota State College, Brookings,
South Dakota.

Mowbray, A. H.

1946

"Insurance" part 1-5. McCraw-Hill Book Company,
Inc., New York.

Peterson, E., and Plowman, E. G.

/6’:<“ ‘

'-}948

"Business Organization and Management" ch. 1-15.
Richard D. Irwin, Inc., Chicago.

Plummer, W. C.

1929

1930

”Credit Extension and Business Failures" Trade
Information Bulletin No. 827. U. S. Department
of Commerce, Washington, D. C.

"Credit Extension and Business Failures Among
Philadelphia Grocers" Ibid No. 700. U. S.
Department of Commerce, Washington, D. C.

Riegel, R. and Miller, J. S.

1947

"Insurance Principles and Practices" ch. 28-29.
Prentice-Hall, Inc., New‘York.

101

Sadd, v., and Williams, R. T.

1952 "Causes of Commercial Bankruptcies" Domestic
Commerce Series No. 69. U. S. Department of
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Shultz, William J.

1947 "Credit and Collection Management" ch. 21-24.
Prentice-Hall, Inc., New York.

Starr, G. W., and Steiner, G. A.

1959' "Business Turnover of Indiana Retail Trades”
Study No. 19. Indiana University, Bureau of
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Taussig, F. W., and Jeslyn, C. S.

1952 "American Business Leaders" ch. 20. The Mac-
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Towle, Herbert W.

1956 "Business Cycles and Business Men” Scribner's
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U. S. Department of Commerce

1952 "Causes of Failure Among Drug Stores" Domestic
Commerce Series No. 59. U. S. Government Print-
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_Ulmer, Melville J.
.3 J)
{:9 1947 "The Postwar Business POpulation" Survey of
Current Business, January, 1947. U. S. Department
of Commerce, Washington, D. C.

1948 ”Industrial Patterns of the Business Population"
Ibid, May, 1948. .
Ulmer, M. J., and Nielsen, A.

1947 "Business Turnover and Causes of Failure" Ibid,
Epril, 1947.

APPENDIX A

102

Business Population for 1944 and 1949 by States

 

Percent
State 1944 1949 of change
Alabama 21,741 56,257 /66%
Arizona 5,895 9,957 {69
Arkansas 20,102 50,067 {49
California 125,895 188,221 {49
Colorado 17,576 26,759 {42
Connecticut 51,659 40,256 {27
Delaware 4,499 5,920 {55
District of Columbia 10,612 9,117 -14
Florida 29,012 50,748 {78
Georgia 29,656 46,597 {56
Idaho 7,276 10,665 {46
Illinois 141,268 170,552 {20
Indiana 55,114 69,862 {26
Iowa 41,407 55,424 {28
Kansas 26,885 59,922 {48
Kentucky 29,670 40,680 {57
Louisiana 25,857 57,715 {46
Maine 15,556 16,764 {25
Maryland 50,879 55,458 {E4
Massachusetts 75,752 89,912 {18
Michigan 75,050 100,551 {55
Minnesota 45,922 57,769 {25
Mississippi 17,274 27,780 {60

105

 

Percent
State 1944 1949 of change
Missouri 60,460 78,558 {29
MOntana 8,405 11,495 {55
Nebraska 22,567 29,591 {50
Nevada 2,202 5,590 {49
New Hampshire 8,661 10,649 {25
New Jersey 75,525 94,149 {24
New Mexico 6,201 11,767 {88
New York 255,545 508,041 {50
North Carolina 54,252 50,499 {47
North Dakota 9,519 11,982 {27
Ohio 102,469 152,521 {29
Oklahoma 27,898 59,774 {42
Oregon 25,184 51,566 /56
Pennsylvania 155,505 185,961 {18
Rhode Island 12,156 16,425 {55
South Carolina 16,515 25,419 {55
South Dakota 10,227 15,555 {52
Tennessee 29,482 46,149 {56
Texas 87,699 155,620 {52
Utah 7,757 11,277 {45
Vermont 6,102 7,196 {16
Virginia 29,901 45,182 {44
Washington 51,915 44,402 {59
west Virginia 20,142 27,047 {54

104

 

 

 

Percent
State 1944 1949 of change
Wisconsin 59,205 72,545 {22
Wyoming 5,866 5,560 {egg
Total 1,968,847 2, 655, 959 54

 

 

 

 

The above totals are the number of concerns that
appeared in the Dun & Bradstreet Reference Books for
January, 1944 and 1949. The listing include all types of
businesses, mainly, manufacturers, wholesalers, retailers,

and building contractors.

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106

APPENDIX C

United States Division and States

New England 4.
Maine

New Hampshire

Vermont

Massachusetts

Rhode Island

Connecticut

Middle Atlantic
New York 5.
New Jersey

Pennsylvania

East North Central
Ohio

Indiana

Illinois

Michigan

Wisconsin

West North Central

 

Minnesota
Iowa
Missouri
North Dakota
South Dakota
Nebraska

Kansas

South Atlantic
Delaware

Maryland

District of Columbia
Virginia

We st Virginia

North Carolina
South Carolina
Georgia

Florida

6.

East South Central

 

Kentucky
Tennessee
Alabama

Mississippi

West South Central
Arkansas

Louisiana

Oklahoma

Texas

Mountain
Montana
Idaho
Wyoming
Colorado
New Mexico
Arizona
Utah

Nevada

Pacific
Washington
Oregon

California

107

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