Bankruptcy is usually the last thing on mind when a business is first started. However, small business bankruptcy is quite common or you can say more businesses declare bankruptcy than expected. It may be due to adverse circumstances or mismanagement of books, but the end is all the same.
While trouble can arise from anywhere, every organization should maintain a frequently-updated record of transactions. It isn’t necessary to do that manually; many free accounting software can help businesses manage all data and business record efficiently.
Reason Behind Small Business Bankruptcy
When a small business has a hard time and can’t recover from the piling losses, they have to declare themselves bankrupt. The number of small business bankruptcies increased from 20,000 to 45,000 in 2008. Bankruptcy is generally considered a last resort and only makes sense in certain circumstances.
Starting a business is tough. For growth stoppers to investment headaches, starting and expanding a company is far from easy. While some sail through, there are others that drown in the cascading depths of bankruptcy. Here are a few reasons why:
Growth requires investment, which is why companies, both startups and well-established, borrow a lot of money. While the money can really help if utilized properly, if borrowed more than the replaying ability of a business, it can lead to overextension.
Overextension is the reason why most businesses fail – when the loan is far larger than the revenue generated.
Problems that Inhibit Profitability
Failure of a business isn’t only related to finances. Other problems like loss of important employees, unsuitable business location, personal issues and lawsuits etc. can also be the catalyst behind bankruptcy.
Deficiency in Accounting and Bookkeeping
The organization should maintain a proper record of accounts so they can analyze the financial position of the organization and use the resources accordingly. At times, underestimating the financial expenditure of the business can lead to an undesirable end.
How to Avoid Bankruptcy?
While small business bankruptcy is often declared, it can certainly be avoided in the first place by implementing some real-life business practices.
Priority Debt Repayment
Instead of only expanding and repaying later, give due importance to debt repayment. If you wait for long, the payback will become huge, considering the interest rate. Plus, if you fail to repay a debt, you’ll have no one to turn to except loan sharks – which you really don’t want.
Prefer Cash Settlements
This may sound ironic, considering that if cash was plentiful, the business would not be failing. However, cash settlements offer liquidity to a business, which is important in the early stage of a business.
Have A Written Business Plan
Every business should have a written plan that describes strategies and tactics related to capital expenses, operating expenses, cash flow, fund flow, working capital, performance objective, etc. along with a means to track the performance.
Elimination of Unwanted Expenses
You can analyze your bank account statement and cash record to remove or decrease unwanted expenses in the business. You should know what and how much goes where. It will help you track your expenses and predict the future requirements of your business.
Stay in Touch with Lenders
If you have a problem or are late on debt repayment, it will raise a red flag with your lenders. If you are in trouble, then you should discuss it with your lender. Keeping everyone in the loop can have a positive impact in the long run.
Sell Off Unnecessary Holdings
At times, businesses are full of non-essential expenses that may be considered essential but are just working to burgeon the bill. It is important to sort such holdings not once, but regularly, and sell off anything concluded to be unnecessary. This will help you manage your finances in a proper manner.
Deal with Your Personal Debt On Priority
A businessman should prioritize his personal debts, as this can help in maintaining credibility in the market. So, at the very least, take your own current financial situation into serious account before proceeding to pay off larger debts.
Most businesses fail within a year of their inception. The rate at which this happens is alarming. In order to increase your chances of success, try to maintain some liquidity in the business so that the pressure can be reduced to a certain extent. Thus, every businessman should use business accounting software (opens in a new tab/window) to understand the true financial position of a business.
“Always maintain an updated business plan and be totally committed to its achievement,” says turnaround expert, Chuck Benjamin.