The purpose of any business is to make money. As simple as that sounds, it’s not always easy to do. In fact, sometimes profitability is so low that a business may be literally forced into bankruptcy. However, if you are well-versed in the leading causes of business bankruptcy, you can often take preventative measures to help you avoid that dreaded worst-case scenario. Here are five of the most common causes of business bankruptcy, not in any specific order. They are just the most important things to be aware of to have preventative measures in place.
1. The Best Small Business Liability Insurance Coverage
Small business liability insurance is coverage for indemnifying your business from losses you can be held accountable for. If you don’t have sufficient coverage and a claim is brought against you, the settlement can be high enough to bankrupt you. While not the leading cause of bankruptcy, it can prove to be one of the costliest because not only are you being bankrupt, you will not have the resources going forward to make sufficient money to pay that debt. However, with adequate insurance coverage, you may be able to mitigate that risk.
2. Inadequate Cash Flow
It could be a matter of unpaid accounts receivable, and then again, it could be that you simply aren’t selling products or services. Many contributing factors would put you into the red, a negative cash flow, and when that happens, there may be no way forward. As the old cliché goes, it takes money to make money.
3. Poor Administration
This will always be one of the leading reasons for small business bankruptcy. Many startups have wonderful ideas and a market ripe for what they have to offer, but they lack sound business administration. In order to avoid getting into a situation like this, it would probably be wise to hire a business administrator, in-house or outsourced, the moment you notice you are not making a profit.
4. Funding and Financing
Unfortunately, once you reach the point where you are losing money and carry a huge amount of debt, it can be a bit of a challenge to find the financing or funding necessary to keep your doors open. The best way to avoid getting into a situation like this might be to check into invoice factoring. Perhaps you might want to take a pre-emptive move when you notice profits dropping. Get that loan early enough to let it work for you.
5. And Everything Else
Then, there are external factors that you cannot control. Just look at how the global pandemic literally crippled the nation; in fact, many nations around the globe. Sometimes you just can’t foresee an event of these proportions, as was the case with Covid-19. From geopolitical unrest to acts of nature, there is always the danger that external forces are working against you. The only way to survive something like this is to have adequate savings to seed a reorganization if the need arises.
Only in understanding the leading causes of bankruptcy can you take preventative measures to avoid that worst-case scenario.