And the mistakes to avoid…
In 2020, over 600 corporations in the U.S. filed for bankruptcy. In India, that number touched 72. And in China, over 200,000 companies went bankrupt in the first two months of 2020. Declaring bankruptcy is becoming a common recourse for big and small companies. But what is causing companies to go bankrupt?
#1 Poor economic conditions
Covid-19 upended how businesses function. As borders closed, customers halted unnecessary spending, and companies shifted to the work-from-home model, market conditions changed in all respects. Poor conditions like these in the market often lead to bankruptcies.
When a country or company witnesses low economic growth, it enters the “bust period”. During this period, consumer confidence declines and spending drops. This leads to a fall in revenue, as we saw with the Chinese real estate company Evergrande’s downfall.
#2 Going into debt
Often, to pursue their business goals like expansion, businesses take loans. Companies end up taking multiple loans or a few loans of really high amounts, even though their business idea doesn’t prove to be profitable sometimes. Because of that, they may be unable to repay the loans on time or at all, leading to defaults. A default is the situation when you miss repaying the loan altogether. The company then goes into debt, and that usually leads to bankruptcy.
#3 Imprudent decision-making
Lack of planning, researching and strategizing often leads to bankruptcy. That’s because companies fail to understand market needs. They end up creating products that customers are not interested in buying. This way, they lose money and are unable to get significant returns on their investment. When it comes to decision-making, a Harvard Business Review report rightly noted, “The problem is not inaction, it is not taking appropriate action.”
Factors such as losing key employees and not focusing on collecting money also play a role in the lead-up to bankruptcy.
How can you avoid going bust as a startup?
These are our top tips:
#1 Build a comprehensive business plan
Typically, a business plan covers your business strategies, performance trackers, goals, and finances. As the company grows, the business plan gets left behind. Make sure your business plan becomes your company’s bible. Expand it to include market analysis to ensure your product remains relevant, an investing strategy, and a budget.
#2 Give due attention to consumer preferences
What customers want is ever-changing, and that is often influenced by changing economic conditions. For instance, during Covid, more people bought health-related products, like organic foods, to boost their immunity. That’s why it’s important to have a dedicated team to analyze market trends. This way, your product will always stay in demand, and you will have a positive cash flow, keeping you safe from bankruptcy.
#3 Do not borrow too much money
Yes, your great business ideas need investment. And loans are a great way to enable that. But if you try to fill your cash flow gaps by availing of loans, it can be very risky. If your business idea doesn’t sell, you will end up in debt. It is better to try and effectively use your existing assets and funds. Don’t rely on loans alone.
#4 Always get your money bank
In the beginning stages of your business, some people may offer to buy your product and pay later. However, if you don’t collect money from them in time, that might contribute to bankruptcy. For this, Karen Mills of Harvard Business School advised asking customers to prepay for future activities. She noted, “The whole strategy is to stay liquid, so you could offer a discount on next year’s activity if people pay up front.”
#5 Rule out any unnecessary expenses
Review your financial statements to see if your company is making any unnecessary expenditures. Check to see if you are paying for a product or service that you don’t use. Eliminate needless spending to avoid bankruptcy.
Bankruptcy does not signify the end of a company. After all, many well-known companies have successfully exited bankruptcy, including General Motors, Chrysler and more. While bankruptcy can lead to the sale of a company, it can also be a chance to restructure and begin again.
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