The Leading Causes of Business Bankruptcy
Bankruptcy doesn’t discriminate. Whether you’re an entrepreneur trying to break into the market with an ambitious start-up, or an established corporate, running out of capital and having to declare insolvency is a potential reality. There are numerous reasons why bankruptcy can occur.
The pandemic has taught us a proper lesson: a robust overarching business strategy should be agile and flexible enough to incorporate emergency amendments. So, in this light, let’s look at some of the main reasons why companies may file for bankruptcy.
It’s almost impossible to predict market conditions accurately; there are so many influential variables. Therefore, it’s crucial how and where you invest the business’s funds. If you blindly put into a fund that promises high returns, it generally means that the fund is more susceptible to market volatility. You may not be able to afford periods of prolonged underperformance.
Richard Branson put it best: ‘Customers come second, employees first.’ It’s an attitude that generates an emotional ‘profit’ to both the business and, by extension, your clients. How you treat your employees has a significant ripple effect that can influence client acquisition, output efficiency and general morale.
Poor management skills
Employee management presents a dichotomy: on the one hand, employees are hired to perform a job for which they will receive compensation, but they’re also red-blooded human beings and deserve to be treated with dignity and respect. A leader must be able to view every employee from a holistic perspective. A mistake or error doesn’t equate to incompetency, and continual discouragement is entirely counterproductive.
Result: A high-staff turnover rate and damaging brand reputation.
Please understand that effective communication between you and your employees is crucial for business success. The workplace should have an inherent, unique culture or ‘personality’ that resonates with all employees to ensure they enjoy working for your business.
Tips for better communication include:
- Actively listening to any issues your employees may have.
- Scheduling regular one-to-one meetings.
- Understand unspoken signals – e.g., negative body language; overall apathy and act accordingly.
- Recognising and praising employees’ work.
Excess use of credit
Very few businesses have the luxury of an unlimited source of capital. At some point, using a credit facility is likely to be necessary. There are different types that a business can utilise, such as
- Business loans from a financial institution, e.g. a bank
- Alternative business funding, e.g. private companies that offer business financing
- Business credit cards (short-term credit solution)
Standard business loans
The major banks in South Africa typically offer several loan options, such as fixed-term and revolving loans. Interest rates are usually personalised; they are determined by factors such as the amount of credit, repayment period, and risk profile. Whichever you choose, you’ll have minimum instalments that you must pay. If you don’t have a solid budget strategy, overspending can reduce your cash flow, causing an irrecoverable negative financial ripple effect.
Alternative business funding
These are private companies that tend to partner with banks, lenders and have particular service options depending on your credit needs.
According to an article published by Business Tech, “There are more than 2.5 million small and medium-sized enterprises (SMEs) in South Africa; however, accessing funding remains still a major challenge for many entrepreneurs. SME lending is a massive gap and a global problem. As SMEs are the lifeblood of any economy, these new financing players must succeed and meet the needs of this market.”
This is a fantastic option for start-ups and SMEs, but it’s still a credit agreement. It can easily be abused by unnecessary spending.
Business credit cards
We all know how easy it is to swipe the business credit card, and, poof, you can have your desired item. Remember that credit card interest rates are high, and if you are only paying the minimum every month, you’re going to fall victim to compound interest. Furthermore, should the interest rates increase, you’re going to have more difficulty lessening your debt.
Poor decision making due to lack of strategy
The truth is that not everyone is financially savvy, and it’s in your best interests to speak to a reputable business consultancy that has access to expert independent financial advisers who can help you develop a robust, feasible financial strategy. Your money should be strategically allocated to different budgets.
Other causes of bankruptcy
Many indirect ways can cause financial distress and ultimately bankruptcy. These include a lack of fundamental marketing research and development. For example, you can spend millions of rand creating a product that simply doesn’t appeal to the market. There’s a marketing saying that you need to remember: There may be a gap in the market, but is there a market in the gap?
The bottom line is that keeping a business afloat and reaching your revenue growth goals is challenging; the reality of bankruptcy will always exist. However, with excellent leadership and the implementation of strategic preemptive tactics, it’s possible to safeguard your business and never have to declare bankruptcy.