How Do Businesses Go Bankrupt?

The financial crisis between 2007 and 2008 saw many businesses file for bankruptcy. However, hundreds of companies file every year for a litany of reasons. As a precaution, it is worth it for any entrepreneur to speak to a bankruptcy lawyer well before the risk of filing is on the horizon, just to become familiar with the risks and also how to avoid going bankrupt. Consider it as part of an investment for the ‘health’ of your business.

Lack of Viability

A lack of viability is a sure way to struggle with your business. Part of ensuring viability involves making sure people want your product or service over a long period of time. Many businesses fail because they are entering an oversaturated market and there is too much competition. Every business needs to find a niche or a unique take on their product or service. If you open a small clothing store, then you need to offer consumers something they will not get by going to Target or Wal-Mart. Additionally, some businesses are based around an idea that is simply poorly thought out. Before starting any business, you should ask yourself what problem your company solves, and how is it different or better than the next guy.

Lack of Liquidity

In the event your company requires an influx of cash, the easiest thing you can do is sell off an asset. A bankruptcy lawyer can look at the assets you have acquired over the years and determine what would be best to turn into cash. This can include equipment, property, or even labor. A company may even need to sell excess inventory to pay employees’ paychecks.

Poor Leadership

When you run a business, you want to bring on other people to help you make important decisions. Candidates and employees should be carefully vetted so that you know you are only bringing on the best. You want to hire people who know how to make hard decisions, know how to prioritize, and are able to inspire employees.

No Solvency

Solvency is similar to liquidity, but it is more closely related to the debts a company needs to repay. Every business will require a loan at one point or another, but it needs to pay off this loan in a timely fashion with interest. You should be able to make loan payments on time while still being able to keep the business operational. Identify your “current ratio.” This is the rate of current assets, such as inventory, supplies and receivables, compared to current liabilities, which include monthly payments, payroll taxes and debts. Ideally, you want a current ratio of 2:1.

There are a number of ways businesses can lose revenue to an extreme degree. If your business seems to be inching toward this downward trend, then it would be wise to consult a bankruptcy lawyer to review your options.

The Law Offices of Brent D. George are here to help. Feel free to contact us – our first consultation is free.

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