If your business is struggling to stay afloat right now, then you are not alone. In a recent study, it was discovered that the number of small businesses opened decreased by 29% between January 2020 and December 2020.
While these figures may seem discouraging, it should be understood that more than 66% of private companies open since the start of 2020 are still operating after eleven o’clock. Some have probably experienced monetary problems, but they managed to overcome them.
This guide explains why businesses go bankrupt and how to avoid it. Read on.
Why do businesses go bankrupt?
Several factors are responsible for the reasons why businesses (small, medium and large) go bankrupt. Here are a few.
Powerless decision making
Lack of balanced thinking and planning can lead to hasty decisions. It could also lead to business failure.
For example, an entrepreneur can invest a lot of energy and money to create a product they trust without doing proper investigation of potential customers. The study of the cost of production can also be neglected. This could eventually lead to the bankruptcy of a business.
Market / economic situations
When the general state of the economy is bad, it can affect the health of a business. In addition, the market conditions in which your business operates are important – when they are bad, it is usually one of the main reasons for insolvency.
Typically, the economy will follow a rise and fall of rapid expansion followed by pauses or slowdowns. During downturns, spending and consumer confidence are more likely to decline, which can lead to low income. Organizations engaged in explicit niche markets may be subject to significant shifts in inclinations.
Strategies to prevent your business from going bankrupt
There are some things you can do to protect your business from bankruptcy. Here are a few of them.
Don’t neglect people. They are essential to the survival of your business. Many people often err in paying more attention to software, hardware, and reporting, without focusing on how to improve human capital (the most powerful asset) in their businesses. Human assets are essential. All policies, procedures and systems can only become very effective if the people who use them are effective. They are as good as those who work them.
And a good look might suggest that some of the staff are stars and others are average. It’s not correct. This should be followed with an open mind. Managers and internal employees always have their own roles and agendas.
If your business’s cash flow is abundant, it’s very rare to experience a declining business. A good cash flow makes a business prosper. All things considered, building a solid cash flow may not be easy. But keep working on it because low cash flow can make resolving insolvency difficult.
In the underlying stages of starting your business and struggling, you may seek help from multiple investors – or be able to raise funds on your own.
- Go fast but not stupid
At any point when rapid changes need to be made to help a struggling business, those changes can be foolish and foolish.
Removing a supplier, process, product, or compromising the quality of an item for an inferior item will result in underlying cost savings. The only problem is that, in the long run, it weakens your business. Never go into panic mode.
Unfortunately, many businesses don’t understand how to calculate their Exceptional Selling Days (DSOs). The DSO helps you calculate the time frame within which your customers make their payments. Calculating the DSO helps you understand your customers’ payment pattern and know when to request or use other metrics to demand payment.
Moreover, to improve your customers’ payment time, you must provide exceptional service compared to your competition. Not to mention that you have to maintain a good relationship with your customers. Furthermore, to understand how to calculate the DSO with ease, you might need the services.
Any business, large or small, can be insolvent. The cause of business failure is often the result of bad decisions and bad planning. In addition, market situations can be responsible. Your business must continue to improve its cash flow to protect it from bankruptcy. Finally, it will be difficult for your business to go bankrupt if you study the DSO and take the other steps outlined here.