If your business is currently battling to stay afloat, then you are not alone in this. In a recent study, it was discovered that the quantity of small open businesses declined by twenty-nine percent between January 2020 and December 2020.
Sure, these numbers may appear to be discouraging, you still need to understand that more than 66% of private businesses opened from the beginning of the year 2020 still operate after eleven. Some probably experienced monetary issues, yet they were able to defeat them.
This guide explores why businesses go into bankruptcy and how it can be avoided. Read on.
Why do businesses go into bankruptcy?
Several factors are responsible for the reasons why businesses (small, medium, and big) go through bankruptcy. Here are some of them.
Helpless decision making
The absence of level-heading thinking and planning can prompt making decisions in haste. This could also lead to business failure.
For instance, an entrepreneur may invest much energy and cash to build a product he or she trusts without doing a proper survey about potential customers. Studying the cost of production may also be neglected. This could eventually lead to the bankruptcy of a business.
When the overall condition of the economy is poor, it may affect the health of a business. Also, the market conditions where your business operates is important – when poor, it’s usually one of the top reasons for insolvency.
Generally, the economy will follow a rise-and-fall of fast expansion followed by breaks or downturns. During the bust periods, consumer spending and confidence are more likely to decline, which can prompt low income. Organizations engaged with explicit niche markets can be susceptible to shifts in susceptible inclinations.
Strategies for Preventing Your Business from Bankruptcy
There are certain things you can do that will safeguard your business from going bankrupt. Below are some of them.
- Prioritize human asset
Don’t neglect the people. They are vital for the survival of your business. A lot of people often go wrong by paying more attention to the software, hardware, and reports, with little focus on how to improve the human capital (the most powerful asset) of their companies. Human assets are key. All the policies, procedures, and systems can only become very effective if people working them are efficient. They are as good as those working them.
And some good insight might suggest that some staff to be stars and others to be average. This is not correct. This needs to be tracked with an open mind. Managers and internal employees always have their unique roles and agendas.
- Expand your cash flow
If the cash flow of your business is bountiful, it’s very rare to experience a falling business. A good cash flow makes a business flourish. All things considered, it may not be easy to build a solid cash flow. But keep working at it as a poor cash flow may make it overwhelming to fix insolvency.
In the underlying phases of starting your business and struggling, you may seek help from several investors – or be capable of raising the money by yourself.
- Move quickly but not stupid
At any point when speedy changes should be made to help a struggling business, those changes could be penny-wise as well as pound foolish.
Chopping out a vendor, process, product, or compromising the quality of an item for an inferior one will prompt underlying cost savings. The only issue is that, over the long haul, it weakens your business. Never go into panic mode.
- Days Sales Outstanding
Unfortunately, a lot of businesses don’t understand how to calculate their Days Sales Outstanding (DSO). The DSO helps you to calculate the timeframe within which your customers make payments. Calculating the DSO helps you understand your customer payment pattern and know when to request or use other measures to demand for payment.
Also, to improve the timeframe it takes your customers to make payment, you need to provide exceptional services compared to your competitors. Not to mention, you need to maintain a good relationship with your customers. Furthermore, to understand how to calculate DSO with simplicity, you may need the services.
Any business, big or small can experience insolvency. The cause of business bankruptcy is often a result of poor decisions and planning. Also, market situations may be responsible. Your business needs to keep improving its cash flow to protect it from going through bankruptcy. Finally, it will be difficult for your business to go bankrupt if you study the DSO and take other measures highlighted here.