When businesses and funds are mishandled, they go bankrupt. A person or business is bankrupt when there is an inability to pay back outstanding debts. Bankruptcy is the legal proceeding in which a person or business files due to their incapability to repay their unpaid debts.
Bankruptcy offers those who filed it the opportunity to have a fresh start, as it forgives debts that could no longer be paid. It also offers the creditors the chance to have some form of repayment.
Repayment is paying back the money owed to the creditors in staggered payments. It usually includes the principal plus the corresponding interest. Once the bankruptcy hearings are completed, debtors are relieved from their financial obligations to their creditors.
Why Businesses File Bankruptcy
Running a business is not easy, which is why only the strong survive. Those who are able to manage their customers, products and finances are the ones who thrive. Businesses that were not able to prosper often end up going bankrupt.
What are the reasons that lead to business bankruptcy? Here are some of the factors that may have led to it:
1. Business Model
Every venture should have a solid business model. Business models are methods that a company continuously improves upon to create value for its clients and customers.
Problems can arise in a business model such as saturated markets, barriers to entry, out-of-date technology, difficulty in implementing the business, too many competitors and products that are simply a bad idea. Bad business models can wreck a company.
Businesses should be able to determine what their customers want and need. They should also be able to manufacture and deliver products to their customers efficiently.
2. Management Style and Work Attitude
Internal problems like management issues and employee work attitude also contribute to the business becoming bankrupt. The lack of leadership on the part of the management may cause employees to leave and clients to switch to other competitors.
3. Financial Problems
If businesses do not have the capital to keep their operations going, they will definitely go bankrupt. Most financial problems are due to the mismanagement of funds.
Other causes include inadequate capital, which means that, from the start, the business did not know how much capital they really needed to start the company.
Another reason is the shortage of cash flow. Every business’ goal is to maximize profits and sales. Some businesses may have a high sales volume, but fail to survive because these sales were purchased on credit. Some businesses must wait for months or even years before they can collect from their clients.
Instances when these clients default, the business will have a hard time getting their money back.
4. Economic Problems
Instances when customers have spending changes, businesses suffer. There are times when customers adjust their spending due to financial restraint and just purchase what they need.
Market changes also affect the way customers buy. Businesses should be able to adjust to these changes in order to survive.
How Businesses Can Avoid Bankruptcy
Many factors affect business bankruptcy. However, businesses can also implement solutions in order to avoid bankruptcy.
These are ways businesses can reduce business bankruptcy and strive for long-term profits:
1. Create a solid and feasible business model.
A good business model is based on extensive research and planning. Therefore, as you start a business, create a business model based on your market research.
Know your niche; learn what they need and what they think is lacking in the market.
2. Improve your management style
Improving the way you handle the business as well as your employees can help when it comes to their motivation.
Management should be able to make the hard decisions for the good of the stakeholders and the business.
The ability to think under pressure, organize priorities and motivate others are ways to improve management.
3. Control your finances
Controlling the way you spend the company’s funds is not enough to keep a business away from bankruptcy.
The business must learn how to minimize selling on credit. If there are instances of outstanding credit, think of ways to collect them.
In a world where cash is king, you will not survive if you rely on sales based on credit.
4. Adjust to changing economic factors
Lastly, being able to cope with the dynamics of the economy is a way to help the business thrive.
Keeping up with the industry trends show that your product is diverse and can cater to the needs of the customers.
Businesses that fail to keep up with the needs of their customers can cause their products to become obsolete.
Every business has it has challenges along with its successes. Staying afloat financially should be the main focus for every business owner, and hopefully, these tips will encourage you to do what it takes to ensure long-term profits while reducing the risk of business bankruptcy.
Author:Veronica Ferguson is equipped with more than 20 years of experience as a businesswoman. She is currently writing her next big project and hopes her pieces would impart vital knowledge to her readers. Veronica is a family woman and is often with her family during her free time.