How to avoid bankruptcy
Bankruptcies continue to soar, particularly in small businesses. Indeed, analyses of why businesses go to the wall have found that up to 90 per cent of organisations that end in financial ruin made the same mistakes. The message is that, if your business repeats these mistakes, you too will walk the same path to financial ruin. So, before it's too late, consider the following sound advice...
1. Know why businesses fail.
Many businesses fail within five years of setting up. Early indicators on the road to bankruptcy would include…
- Low profits. Likely causes are poor sales performance, wrong pricing strategies, poor purchasing, inability to control expenses, and poor decision making.
- Falling sales. Likely causes are old product, poor marketing strategies, targeting the wrong clients, new competition, and poor staff performance.
- Low productivity. Likely causes are low staff motivation, high absenteeism, old equipment, wastage, lack of staff training, and lack of operating systems.
- Cash flow problems. Causes may be poor pricing policy, falling sales, high expenses, undercapitalisation, excess stock, debtors slow to pay, poor use of financial records.
- Lack of customers. Likely causes are inappropriate marketing strategies, new competition, wrong location, poor signage, and poor visibility.
- Overdraft at maximum. Causes could be poor financial control and record keeping, poor credit control, low productivity, poor choice of finance, poor stock control, and undercapitalisation.
By addressing such symptoms early and taking control of business, the chances of avoiding bankruptcy are improved.
2. Develop and follow a business plan.
Successful businesses invariably have a business plan in place. For larger enterprises, such plans are vital. On the other hand, smaller businesses, too easily caught up in the excitement and minutae of the daily grind, tend to be easily distracted from the larger picture, are readily diverted from an essential strategic course - and falsely believe a business plan is unnecessary. Without one, however, they have no yardstick by which to measure their performance. Financial ruin can so easily sneak up on them.
3. Ensure you have sufficient capital.
Smaller businesses traditionally begin under-capitalised - which often means that they have no financial buffer for quieter times or for that unexpected expense. The problem compounds when they have no arrangements in place with their banks to bail them out of trouble in the tough times. It's vital to know how much capital your business will need at all times.
