Bankruptcy

Wikipedia defines bankruptcy as "a legally declared inability or impairment of an individual or organization to pay their creditors." (5/20/2008). This is as good a definition as any. It occurs when you have no more cash.

Never mind profit. Plenty of businesses are profitable but have no cash. The joke goes, "What are the four last words of a dying business?" -- But we were profitable.

Profit is an accounting concept. It is one measure of how you are doing. How much cash you are generating is another. That one keeps you in business. Of course spurning profit for short-run cash is not good either. Profitability and "Cashflowability" are both important to know about. See Bill McGuinnis, Cash Rules (2000).

He compares a business that has run out of cash with a car that has run of out of gas. Neither one is of any use to very many people. A business out of cash is a bankrupt business.

Declaring bankruptcy is not always the worst option. Some businesses may wish to go into bankruptcy so they can reorganize, if the courts will let them, and there is some strategy devised to change the business so it can be profitable and generate cash. Some people are so far gone that their only hope is to declare bankruptcy and get on with their lives.

The consequences for the person are terrible and will dog a person for the rest of their lives. And it's harder to declare bankruptcy than it used to be. This makes it more costly for entrepreneurs to fail and start over.

Entrepreneurship is the life's blood of all my professional activities. It makes them go. And go read my mystery for free at wwww.kearneymusicschoolmurders.blogspot.com or buy it from Amazon.com more cheaply than you can print it out.

Profit

The the road to wealth is littered with dying businesses, all crying out: "We turned a big profit last quarter." Here's Wikipedia:

Profit generally is the making of gain in business activity for the benefit of the owners of the business. The word comes from Latin meaning "to make progress," is defined in two different ways, one for economics and one for accounting. Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital. Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses. A key difficulty in measuring either definition of profit is in defining costs. Pure economic monetary profits can be zero or negative even in competitive equilibrium when accounted monetized costs exceed monetized price.

Profit's great, as long as you have cash.

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