bankruptcy is a legal status to which a person or company can use in case they cannot pay their creditors because the economic resources or assets in their hands are not enough.
For this, the company must officially declare bankruptcy, giving way to a bankruptcy. In this situation, the authority will examine and auction all its assets, so that it can settle, as far as possible, the obligations with the creditors.
Causes Of Bankruptcy Of A Company
A company can go bankrupt due to various circumstances, which can be both internal and external. That is to say, some are created by bad administration, and others due to external situations.
Mismanagement of finances, such as excessive spending or poorly focused investments, can lead a company to closure.
However, there are also external situations, such as a lack of demand due to financial complications for consumers, such as the situation we are experiencing with the Covid-19 pandemic.
When Should A Company Declare Bankruptcy?
There are two ways to declare a company bankrupt, the first when requested by the owner(s) of the company; however, it can also be by the company’s creditors, in the absence of payments.
Once that happens, time will be given to see if there is a conciliation with the creditors or an extension for payments. Otherwise, it will be the judge’s decision to grant the bankruptcy of the companies and give way to the commercial bankruptcy
Once bankruptcy is officially declared, the administration of the company’s assets passes into the hands of a Bankruptcy trustee.
Said character must be named in the sentence where the judge declares the bankruptcy of the company. He is given the right to dispose of assets for sale and then proceed with the payment of debts.
Who Gets Paid From The Sale Of Goods?
As the company’s assets are sold, the first thing that is done is pay back taxes, if any, and terminate workers.
Subsequently, the trustee proceeds to pay the creditors and the last one, in case the resources reach the shareholders of the company
The shareholders are last in the payment chain Because starting a business is an investment, and just as it can be fruitful, it also carries the risk that it won’t work and the money will be lost.
This process is not easy and can take from a few months to two to five years. Once the last dollar is handed over and delivered, the legal death of the company is declared.
How To Get A Company Out Of Bankruptcy?
Opening a company is not easy, let alone managing it. However, if it is done responsibly and it is known identify possible risks, You can minimize the possibility of going bankrupt.
The first thing to know is to identify possible problems that could lead to bankruptcy, for example constant months with losses, lack of liquidity or a decrease in the number of clients.
If your company has these three factors, it is time for you to take the necessary measures from an early stage, since the later, the more difficult it will be to change the company’s negative course.
These are some measures you can implement:
1. Not Having Enough Funds
Many entrepreneurs make the mistake of starting their business without having enough money . A very common reason for the bankruptcy of new companies is the lack of a contingency fund to cover unforeseen or emergency costs.
A business with insufficient funds and that also has no profits (most common in the first months of any new company) can accumulate thousands of dollars of debt in a very short time.
To avoid this situation, you must plan the first months of your business’s life well to avoid bankruptcy at all costs, and a good way to do it is to have a reserve of money or have the option of requesting a loan that allows you to assume unforeseen events.
2. Rigidity In The Strategy
Many new companies have ended up sinking because their owners “fell in love” with their master plan or grand strategy and did not know how to or did not want to change the situation when there was still time. In fact, this is one of the most common reasons for the bankruptcy of newly created companies.
No matter how good your strategy is, if it doesn’t produce results it’s not worth a penny . In this situation, many people tend to continue with that initial strategy even if they do not see results, under the pretext that it takes time or that it will end up giving results. The vast majority of times this situation ends with a huge debt for the company.
When you design your master plan, you should burn the following into your mind: that plan is not the only thing that matters. In fact, the only thing that matters is success and not bankrupting your company. Therefore, you should make sure that your plan is feasible and that you can adjust it according to reality and the day-to-day life of your business.
Having management software that allows you to consult data in real time and detect points of improvement before they become a problem is a very interesting option to consider. Of course, avoid working with software that involves a very large initial investment, it is better to opt for a solution with a monthly fee that allows you to unsubscribe at any time. In this way, if our business does not finally succeed, we will not have assumed too great a risk.
3. Not Knowing The Customers
One of the deadly sins in business is not knowing your customers . Imagine a car salesman who is trying to sell a car to someone with no idea who he is. Without information about customer preferences you have no clues about what to focus on when selling. And that’s what happens when you don’t do a preliminary study of your potential customers.
Some ideas that can help you learn more about them:
- Do a preliminary market study.
- Study the statistics of Google and Facebook.
- Take surveys.
- Conduct personal interviews.
It is also important to try not to be too dependent on one or a few clients. If you have a client that represents 70% of your income and stops buying from you, the situation can become very complicated.
4. Compete On Price
If your business grows but your profit margin continually declines, you’re not doing something right. This strategy can benefit you in the short term and continuously lowering prices can help you get ahead of your competition, but in the end it will have a negative impact on your products or services.
This is a strategy that is not sustainable in the long term, especially when we talk about industries where profit margins are already very low.
5. Poor Money Management
When it comes to money, improvisation is never a good idea. Most likely, if you improvise with your budget, you will fall very short of the expected benefits.
Planning the budget is crucial for any business, it does not matter if it is the bakery below your house or if it is Coca-Cola. Bet on professionals and hire an accounting expert to help you manage your money in the most efficient way.
6. Lack Of Leadership
Your business depends on the people who are part of it. If you do not treat it properly, it is not risky to predict that, in a few months, you will bankrupt your company.
It is not necessary to break your head to create a very elaborate corporate culture, especially if we are talking about very small companies, of 5 or 6 people. Most of the time a good leader just has to make sure they have a good relationship with the employees and get them involved with the company.
A very common mistake among leaders is to fall into micromanagement . A micromanager is one who tries to control absolutely everything that employees do, even the most irrelevant details. This style of leadership causes us to focus on unimportant details instead of looking at the situation in perspective and focusing on what is really important, posing major obstacles to productivity and profitability. It is normal that you want to do everything perfect or that you are upset with the failures of the employees, especially if it is your own business, but if you do not let them grow in the end you will have to deal with an employee who does not feel prepared.
In short, if you can get your employees in tune with your motivations and also offer them a competitive salary, your company will prosper.
7. Relying On Certain Employees
This problem is very common among young companies. When you start, there are many processes to carry out and a lot of work to carry out, and you hire enough personnel to cover it. You end up working with a team that can take on multiple, multitasking tasks, and they are the ones who make your business a success.
Over time, they get so good at those tasks that if you lose one of them, you know you’ll lose profit that month. This situation can lead your company to bankruptcy.
Ownership or boss dependency can also be a problem. If your company does not work when you are on vacation, it means that either you have not inspired your workers enough, or you have not organized the work correctly.
8. Lack Of Relationship With Customers
As an entrepreneur , your job is to get the job done and get paid. As a salesperson , you have to get satisfied customers.
People don’t recommend a business just because they are happy with the result. Their recommendations depend on your emotions . Yes, it is clear that it is important to do impeccable work, but if you want a client to bring you new potential clients, you will have to do that work in a way that makes them happy.
Something as simple as treating the customer with a smile can be the reason for a customer to recommend your business to a friend.
9. Not Being Aware Of Legal Regulations
This factor does not always have to be in your hands, but you should keep it in mind and act quickly when faced with changes in regulations that may affect your company. For example, if you have a restaurant you have to be aware of all the regulations that exist for this type of business. And not only that, you have to be aware of the changes that may occur in these regulations, since if you do not do so, you may have to pay thousands of dollars in fines.
The same applies to any other type of business. Stay up to date on the news in your sector and thus you will be able to avoid problems as much as possible.
It is also possible that the company’s problems go through the financial issue, such as an uncontrolled growth of debts.
In that case, there are companies specialized in repairing debts how to resolve your debt When you approach any of them, they will help you design a payment plan and a savings scheme with which you can clean up your company’s finances.
Bankruptcy of a company is always bad news but before that happens, remember that you must explore even the slightest opportunity so that it does not happen.
