The legislation is much too permissive, says Iancu Guda, chairman of the Association of Financial-Banking Analysts of Romania (AAFBR) and author of the “De ce esueaza companiile? 10 greseli si 100 de solutii” (‘Why do companies fail? 10 mistakes and 100 solutions’) book.
The report Iancu Guda wrote after analyzing 100,000 companies gone insolvent in the past ten years reveals a series of differences between Romania’s regions in terms of causes for failure.
In his opinion, the entrepreneurs in the eastern region of Romania made mistakes of the heart and lost control over spending, deluding themselves they were in control. “I’ve noticed a 12% rise in those companies revenue, right before going insolvent along with a 5% to 6% rise in losses. The entrepreneurs actually lost control over spending as they only paid attention to revenue,” Iancu Guda said on ZF Live.
Companies in the central, northern and western regions made mistakes, too, but they were mistakes of the mind, i.e. they made the wrong investments, did not know the market, the competition, made calculation mistakes and in the end profits failed to cover expenses.
On the other hand, the south of the country has seen most ‘dubious’ insolvencies, Iancu Guda believes, as two thirds of the insolvency cases fall into that category.
“We have most insolvencies opened upon request [by the debtor] (66%) and two out of three insolvent companies here are held by people who have other businesses or started other companies, following the insolvency. There are also all sorts of company expenses that account for a higher portion of the total spending than operating expenses,” Guda said.
“This is also where we can see the biggest decline in revenue of the subject company (8%) coupled with an increase in revenue of other companies in the same group, which actually shows transfer of commercial contracts to other companies.”
Iancu Guda thinks that the bill stipulating a shareholder whose company went insovlent may not start another business for two years is too permissive, since Germany, for instance, imposes a ten-year ban for the same reason.
“Entrepreneurs make financial, management mistakes, as well as emotional mistakes. They use their heart where they should use reason and the other way round. That leads to overconfidence, herd behavior, risk aversion, fear of failure. They make the wrong business decisions. Mistakes are repeated, because they are actually not understood.”
(English version by Loredana Fratila-Cristescu)