Companies can file for Chapter 7 or Chapter 11 bankruptcy. It is a process of debt relief in times of negative cash flow and a drop in sales. Cases had increased in the US with the Great Recession of 2008/09 reaching around 1.5 million annually but have dropped to around half that figure in 2020. As per traditional metrics, surging inflation can become a ‘pain-point’ for the American economy in the post-COVID world. This can increase the probability of high debt-value ratios and bankruptcy. Businesses are likely to sell less with the low purchasing power of buyers, which potentially leads to poor profits.
Often it does not matter what is going on in the broader economy. You can feel the problem in a micro sense too with faulty bookkeeping, over-optimism and over-extension of business. Here’s how to act strategically to avoid bankruptcy.
Solid Business Plan
A solid business plan should include the capital expenses and tactics related to operating budgets, input costs, sales, performance objectives and forecasts and cash flow projections. This helps understand the bigger picture and keeps your business from getting derailed. Entrepreneurs with a transparent plan are 129% more likely to move forward with their business beyond the initial phase and grow. A plan creates a 30% greater chance of growth and can help double the business. Nascent entrepreneurs who completed a business plan were 2.6 times more likely to persist in the process of business emergence than those who lacked a complete plan. Rewrite your plans and keep them as fresh as possible to align with current industry standards.
Cut Unnecessary Expenses
These will include office space larger than you need, high-end technology that is not being utilized to the fullest and human resources that do not perform. Others are late payment fees, food costs, non-energy efficient appliances, big investment trade shows and worthless advertising. It is necessary to trim these during the economic downturns and unforeseen scenarios and slow down production and growth.
Renegotiate all loans and contracts in case you are sensing bankruptcy. If you have longstanding vendors, you can ask for discounts to improve profitability. In case discounts are not possible, you may ask for a longer credit period, as this can increase short term cash flow in the business. Pick technology that can automate functions to avoid hiring more employees. Lay off staff that do not add value to your brand.
Debt Repayment
At the end of 2020, the total debt outstanding for non-financial businesses in the US was about $ 17.7 trillion growing at an average rate of 9.1%. Corporates accounted for the largest share of about 63% in 2020. The pandemic made it even worse by adding to the existing debts. So, try to avoid borrowing in the first place. Clear secured high-interest debts first. Try to negotiate favorable terms and conditions if your business has credibility.
Further, review insurance policies, hire management specialists and keep an eye on the bigger picture. All of this can help avoid business filings during a crisis.
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