Since we live in the age of COVID-19, nothing is for certain. Many businesses have faced dire situations and failed or ran into bankruptcy. When every business’s future is uncertain we can try to educate ourselves for the best ways on how we can avoid slipping into bankruptcy.
What are the Main Causes of Bankruptcy?
The pandemic situation has led to over 30 million Americans filing for unemployment. This is a massive amount. With this in mind, when you are in a situation where you are considering going bankrupt, there are 3 factors to blame the most:
1) Taking on Too Much Debt
Optimistic businessmen will be more liberal with taking on debt under the pretext that “they will make much more money so they can pay it off later”. This causes a debt spiral once you start accumulating more and more interest from different loans over time.
2) Improper Financial Record-keeping
Not taking proper care of your financial records can lead a usually profitable business straight into the ground. You will build up different expenses over time without even realizing it, and soon before you notice, you are going into a horrible deficit.
3) Bad Estimates
When the business is looking well, we tend to spend more money. This can be catastrophic if you estimate that good times will last a longer time than they actually are.
One of the best ways of avoiding bankruptcy before it’s too late is by practising restraint. Do not assume that every product/service will be a smash hit. We like to over-exaggerate how well we will perform in certain areas. This means you should also not overly spend your funds on things you do not absolutely need. You have come into a dire situation for a reason.
If you want any chances of getting out, you need to drastically reduce spending, and spend what money you have on actually vital materials to improve your business. Do not take every risk that is presented to you. Yes, you need to take risks if you want to succeed, but the best entrepreneurs do this by taking calculated risks. You take the least risky risks in which the positives outweigh the negatives.
Rework Your Business Plan
Most of the time, if there are inherent issues with your business that are causing you to lose vast amounts of money and possibly go bankrupt, then there is a structural problem with your business plan. If you do not even have a business plan, then there is all the more reason to actually make one. A business plan is a foundation upon which you build your business on. It defines your company strategy, budget, fiscal standings, and so much more.
The plan allows everyone to be in sync with what the goals of the business are. If the plans are failing you, it is time to make new ones. Mistakes happen, and it shouldn’t discourage you from moving on and revisiting past decisions to see whether you can implement change that can influence the future outcome of your business.
Is Loan Repayment a Viable Business Priority
This is the part where we analyze the situation and how dire it actually is, and how we can get out of this situation in the most effective way. We will explain this process in 4 steps.
1) Make Accurate Records of Your Total Net Income
In this stage, you list all of your sources of income and the accurate amount that you get from every source. Remember to calculate taxes into this income in order to not get a misleading estimate.
2) Subtract Your Expenses
Time to calculate all of the things that you are spending money on. Supplies, food, electricity, and all of the other bare necessities to keep you afloat. After you are done, see the amount of money that you have at your disposal.
3) List the Debt Payments
Time to analyze all of the loans that you currently have. What you want to do is list the loans by priority. The top priority loans have to be the highest interest ones.
4) Subtract the Money You Need to Pay for Loans
Once you have your hierarchy list for loans to pay off, it is time to use most of your remaining money into paying off the highest priority loans. Hopefully, after this, you will still have some spare money to go around for minimal flexibility.
Alternative Solutions to Filing Bankruptcy
If you want to avoid the prospect of going bankrupt at all costs, then these are some of the options you can take:
• Enter a Debt Management Plan
There are agencies with the goal of helping businesses handle suffocating debt problems. The counselling sessions are free of charge with accurate details that can help you find a way out of the predicament you have found yourself in. It is one of the best ways to get efficient insolvency advice.
• Seek Help From Friends and Relatives
When we are facing financial ruin, there is no room for our ego to make the calls. If you have any friends or relatives that are in a much better financial situation, it could prove wise to give them a call in order to work something out for the time being.
• Spend Your Retirement Savings
That cottage in the wood is going to have to wait. If you want to live a better tomorrow, you need to secure it today. In some cases, you will face a financial penalty for taking out the money prematurely, but this can be mitigated by explaining to the proper institutions that you are currently economically unstable and seeking some tax breaks.