By most measures the economy is robust. Unemployment is low. The exchange is roaring. Gross domestic product is rising. Bankruptcy is on few people’s minds under these circumstances.
Corporate bankruptcy tends to be cyclical, and bankruptcy filings trend up and down together with the direction of the macroeconomy. The wake of last decade’s financial crisis (and closer to home here in Michigan, the automotive crisis) and “Great Recession” is where the last big surge in corporate bankruptcy filings came within.
This article addresses things businesses should fathom bankruptcy, and the way to remain out of it. Let’s start by discussing common mistakes that companies make that get them into trouble.
What results in Bankruptcy?
Three of the largest mistakes that may result in bankruptcy include:
because they tackle an excessive amount of debt, many companies—even otherwise healthy ones—find themselves on the brink of insolvency, although growth requires investment. If they can’t service or refinance the debt, they default and are faced with few options aside from trying to reorganize through a Chapter 11 bankruptcy filing.
2. Lack of Bookkeeping/Recordkeeping
When businesses don’t have a decent handle on their books, they often run into difficulty. A business with sloppy bookkeeping is often surprised that its performance isn’t what it expected—revenue is lower and expenses are above it thought. By the time the matter is diagnosed, it’s often too late to mend it. That is where outsourcing bookkeeping to professional financial service providers comes in handy.
An unrealistically rosy outlook gets businesses into trouble. Businesses invest in new projects and new people when things are seemingly good. Their expenses increase in anticipation of recent revenue, but if work they expected to return in gets delayed or canceled, then they’re left scrambling—or worse, find themselves in bankruptcy.
How to Avoid Bankruptcy?
Avoiding bankruptcy requires good fundamental business practices, or in other words, requires discipline, rigor, and smarts. Here are a number of the items businesses should do to steer further from bankruptcy:
1. Be Conservative
Don’t assume every customer goes to pay. Don’t assume every customer goes to remain. Allow an inexpensive case scenario, not a best-case scenario. Be optimistic about the long run, but not overly so. For the world’s top entrepreneurs, like Richard Branson and Jeff Bezos, it’s often assumed that they are swashbuckling risk-takers. While they are doing take risks, it’s always calculated and wiped out in some way that protects against the downside. As a part of his Virgin conglomerate portfolio, Branson, for instance, has experienced many failures, but none so big that it’s knocked him out of the sport.
2. Have a Written Business Plan
As their business “plans” exist solely within the heads of their founders, most businesses start very small. Unfortunately, as businesses grow despite the acute need for one, often there’s still no written business plan.
Every business should have a written plan that describes strategies and tactics associated with things like sales, operating budgets, capital expenses, cash flow, input costs, performance objectives, and a way to trace performance.
Having a thought allows everyone in a very business to grasp the massive picture and direct their actions toward achieving business objectives. The nonexistence of thought is what derails businesses—in fact, without an idea nobody knows what track they’re presupposed to get on in the first place.
3. Prioritize Debt Repayment
As previously discussed, businesses get into trouble after they over-extend. The simplest way to avoid over-extending isn’t to borrow in the first place. The subsequent best way is to confirm that you’re prioritizing debt repayment. Prioritize secured debt (such as a loan secured by a chunk of equipment) and high-interest debt first when evaluating your debt repayment strategy. If you can, avoid unsecured debt (such as MasterCard debt) altogether. In any loan or financing arrangement, negotiate for the simplest terms possible, and confirm to induce it in writing.
4. Eliminate Unnecessary Expenses
Take a glance at your bank and MasterCard statements on a monthly basis. Are you incurring unnecessary expenditures? Are there recurring charges, like for software that you just never use, that you simply can eliminate?
5. Stay connected with Lenders
Stay in close communication together with your lenders. Be tuned in to their requests for information. If you’re having trouble in your business, and you’re late on a debt payment, or miss one altogether, it’ll raise red flags together with your lenders. Failing to retort to your lenders after they inquire on why you were late or missed a payment, will raise even more. On the opposite hand, there’s an opportunity that you’ll be ready to negotiate a payment extension, or restructure your loan terms altogether, if you’re in trouble and approach your lenders with a concept.
6. Review Insurance Policies
Insurance could be a major expense for many businesses. Premiums tend to travel up once a year and suck income removed from more productive uses, from health to disability, to property and casualty. Consult with your insurance broker. Consider what options are available. As an example, by purchasing a policy with a better deductible, you’ll often decrease your monthly premium significantly.
There also are many alternative life assurance options to contemplate. Insurance is cheaper, but an entire life policy offers you the choice to borrow against its cash value. Again, discuss with your agent to work out your needs, and therefore the best way to meet them supported where you’re at in life.