Sometimes, a company bankruptcy or liquidation is simply inevitable. Perhaps the company had a product that exploded in popularity, only to prove to be a fad, and it struggled to find the next new thing to move to. Perhaps a downward turn in the macro economy meant belt-tightening hit the company’s sector hard, and it wasn’t able to pay the bills. Company bankruptcy is often no one’s fault in particular, but it can be crushing to everyone involved.
In many cases, a company that does have to liquidate could have turned things around if it identified early enough that it was running into problems, hired a business turnaround specialist or entered voluntary administration, and adopted some simple strategies to steady the financial boat and give the company some time to turn things around.
What causes company bankruptcy?
There are a couple of common causes that can result in a company being rendered bankrupt. These include:
1. Poor bookkeeping (or even no bookkeeping)
Smaller businesses sometimes have owners and managers that might have great ideas for a business, but aren’t great at keeping records of their company finances. This isn’t just a problem come tax time, but it can also mean that the business can’t keep track of revenue and expenses, leading to the business spending more than the owner realised, or failing to notice a downturn in sales until it was too late.
A business will often bring on new people or try and expand what it’s doing with new products or services. When times are good, there’s plenty of spare cash to make these investments, but if times tighten up, the additional expenditure can quickly eat into profitability and absorb the cash reserves.
3. Too great of an appetite for risk
This often takes the form of the organisation being too willing to take on debt, particularly in the growth stages, before it’s fully aware of its revenue ceilings.
Practical tips for avoiding business liquidation
If you’re facing down a potential company bankruptcy or liquidation, there are still things that you can do to steady the ship, if not turn things around entirely.
1) Have the right priorities with debt repayments
You should look to prioritise secured debt, such as loans secured against business equipment first. The consequence for defaulting on this debt is the loss of the equipment, which is another blow to the business. Paying off high interest debts first is another critical priority, as that’s going to accumulate faster if not paid off quickly.
2) Eliminate unnecessary expenses
Much like you might improve your household budget by cutting back on some luxuries, you’d be surprised how much can be trimmed back from the office expenses. Do you really need to subscribe to newspapers in the era of digital media? And do you need to subscribe to every digital media source, when there’s so many high quality news outlets that are free? It’s nice to buy each staff member a coffee in the morning, but is the morale boost really worth the hit to the balance sheet (hint: buying a Nespresso machine for the office is much cheaper in the long run).
3) Boost your short term cash flow
It can be a pain chasing invoices, but calling in what you’re owed is critical to cash a flow. See if you can also pare back terms so that customers or clients are paying more quickly. On the flip side, negotiate with your lenders to see about getting term extensions for repayments. That way you’ll have more cash coming in, and fewer repayments due imminently, and that will give you some more money to start dealing with the most pressing debts.
4) Consider being more flexible with your recruitment
There are advantages to having staff on full-time (they tend to be more loyal to the organisation, and are more invested in seeing it succeed), but full-time employees are difficult to dislodge, and bring with them a host of other obligations that are expensive to the business. Furthermore, if there’s a downturn in work, you’ll be paying for staff that aren’t doing much. Having part-time or casual employees allows you to be more flexible with your headcount, and helps reduce business cost in lean times. The best solution is to work out what staff are core to the business, and bring them on full-time, while filling out supplemental or support roles on a casual basis.
5) Have a ‘garage sale’
If there are any equipment or assets that are underutilised, or not utilised at all, consider selling them to boost the short term cash position. Have you got a company car that is used once per week for getting someone to a meeting? Setting up a company Uber or Taxi account is going to be much cheaper. Don’t just toss old computer equipment, but sell it for a bit of extra cash (making sure the hard drive is properly wiped of sensitive data, of course!)
Finally, make sure you have a turnaround management specialist you can trust. They’re not going to be your best friend, since saving a business from bankruptcy can mean some very hard choices at times, but that specialist will be able to provide you with sound and dispassionate advice that will help you turn your hard work into a successful business.
Contact Mackay Goodwin online or on 1300 750 599 today to start discussing your options for your business and it’s turnaround.