Bankruptcy

Because by nature they are optimists, small business leaders tend to avoid talking about bankruptcy of their company and/or themselves.

Yet, in 2023, commercial bankruptcies increased by 72% year-over-year, and filings for the discharge of personal debt increased by 18%.  With experts expecting these numbers to go up in 2024, the good news is that they remain below pre-pandemic levels.

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However, small business leaders should still be cognizant of the growing cloud as bankruptcies are becoming more frequent.  “Bankruptcies in all filing categories climbed last year amid the evaporation of pandemic emergency responses, increased interest rates and tougher lending standards,” said ABI Executive Director Amy Quackenboss.

Having identify the trend, there are ways to identify potential issues which could affect your company’s future.

Experts warn that as interest rates remain elevated, financing requirements become more stringent, weakening customer loyalty, increasing geopolitical tensions affecting global supply chains, and growing debt loads, even the strongest companies must remain alert to maintaining financial strength.

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Based on studies of small business bankruptcies, there are four keys to identifying possible future problems.  This is the so-call company ‘FQ’ of financial quality.

1. Weekly cash summary: Does the company have enough cash to finance the coming week’s financial outlays?  Including payroll, expected materials delivery, loan repayment.
2. Line of Credit: Is there a source of funds available to immediately cover any shortfall in the company’s cash position?
3. Accounts receivable: Are 60% or more of all outstanding debts within 80 days of initial rendering?
4. Accounts payable: Are 60% of bills owed outstanding more than 80 days?

If the answer to any of these four questions is yes, small business leaders should highlight them and take steps to alleviate.  If they persist beyond two months, it is time to institute remedies.

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Because many companies, particularly in their early stages, operate on thin margins, FQ guidelines often appear.  This doesn’t mean the company is headed for failure.

However, should they persist for long periods of time, it may suggest that bankruptcy be considered.

As Winston Churchill said: “Success is based on a long series of failure.”

Struggling businesses and families can turn to the proven process of bankruptcy for a financial fresh start.

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