This post was kick-started on twitter between myself @GKTogobo and the lovely @MagentaSkyUK.
She wanted to know how an oil refinery could go bust particularly as they have such high markups and oil is in such huge demand. This was in response to Europe's largest independent refinery Petroplus being placed into administration.
The response to the question needed more than twitter's 140 characters to do it justice.
My initial typical twitter response was: "bad management can make any business go bankrupt. Countries not excluded". Below I elaborate on my answer.
Bankruptcy occurs when a business or country is unable to meet its financial obligations to its creditors. According to reports in the media, this is the case with both Greece and Petroplus.
Financial management is the main responsibility of management so simply putting two and two together means that management is responsible for the problems facing both Greece and Petroplus and for not mitigating the situation or even managing it better than they have. I know its not an easy job running an oil refinery or country and its easy for me to sit in the comfort of my home drawing these conclusions but executive remuneration more than makes up for the heat executives face whilst carrying out their duties.
If Greece is on the verge of bankruptcy because it cannot service its debts and reports show that tax evasion is rampant and the country is still spending more than it makes in Gross Domestic Products then who is to blame? Management (the government) has lost a grip on the country's finances. The blame is theirs to bear.
Economists admit that Greece's problems are unprecedented so no one knows what will happen. So let's watch as it unveils whilst hoping that it doesn't impact the UK any more than it has already.
Every business is a step away from bankruptcy if it's operating by the help of a huge line of credit. Of course management would never admit it, but it only takes a fallout with creditors or damage to trust levels for credit to be frozen. According to the Telegraph, Petroplus had an astronomical £1bn line of credit.
Some factors that may have contibuted to the crisis:
The oil business is very capital intensive so operationally they would need a lot for capital investment for equipment and for the general upkeep of the refinery. The reason why they need access to large sums as working capital hence the line of credit.
Secondly, although there is a high demand for oil, oil is a commodity so the refinery making the cheapest oil gets the customers. There really is no differentiation between the oil Petroplus produces and that of its competitors so it is very easy for it to face financial difficulties if sales contracts are not renewed.
So high fixed capital investment, high working capital and high loans puts this seemingly recession proof business at high risk when the bankers are in trouble.
It's quite a common mistake for businesses with high margins to assume astronomical amounts of debts in the belief that they could make repayments from profits. This only puts them at the mercy of their creditors.
Bad management can harm even the most seemingly profitable and successful businesses and petroleum refineries (and countries) are no exception. No entity is immune to bad management.
Being an ex-auditor myself, the real question I think we should ask is did the auditors pick up on it?