For business owners, the idea of bankruptcy is pretty scary. Every business has ups and downs, but this is the ultimate low. Fortunately, there are steps you can take to protect your business from bankruptcy.
Understand why bankruptcy happens
Before you can protect your business from bankruptcy, it helps to know why businesses go bankrupt in the first place.
Although there are many reasons for business failure, the single biggest cause is that revenue does not cover expenses. This often happens when a company misses its sales projections and cannot bring in enough money to meet its costs.
Another common cause of bankruptcy is poor inventory management. If a company has too much inventory relative to actual sales, it will not be able to take full advantage of discounts and will end up being constantly stuck with unsold goods, which in turn limits its ability to meet its overheads.
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Focus on revenue
Once you understand why your business could have issues with bankruptcy, the first step in protecting it is to keep an eye on its income and make sure that it stays ahead of expenses.
The optimal way to do this is by keeping a close watch over cash flow so that you can see potential problems before they happen. If your sales projections are regularly off, adjust them. Plot how much revenue must come in during each period of the year to cover costs and then make sure you achieve that amount.
This is a good way to protect your business from bankruptcy because it means that even if future income is less than anticipated, you can still survive.
Cut down on expenses
When you are watching your income, it is also a good idea to look at your expenses. Your business has fixed and variable costs that can either help or hinder it from meeting its sales targets. Fixed costs are those that do not change no matter how much revenue comes in. Examples of fixed costs include rent and bank loan repayments.
On the other hand, variable costs change in proportion to changes in sales. For example, if you sell more units, your transport costs will increase.
Get some expert help
No matter how hard you try, there are some things that you won’t be able to know about your business. It is always a good idea to think carefully before rushing into bankruptcy and contacting an expert can help you avoid major problems. An accountant, credit counselor, or insolvency practitioner will assess your current situation, tell you if bankruptcy is inevitable, and advise on the best way forward.
It is worth noting that you will probably need to speak to an insolvency practitioner and not an accountant, as only the former are licensed to provide bankruptcy advice.
You can also read: 5 Types of Equity Financing for Small Business
Prioritize debt payments
It is a good idea to pay down your debt as quickly as possible because if you are unable to keep up with interest payments, you will be forced into bankruptcy. When setting up repayment plans, focus on the debts with the highest interest rates first and leave smaller debts until later.
