Bankruptcy is one of if not the worst thing that could happen to a business.
Not only can it spell the end for the entire company, but it can affects employees, partnering businesses and directors. However, while bankruptcy is a common term, many still aren’t aware of the primary reasons that can cause it.
If that’s you, please read on as we discuss what causes businesses to go bankrupt.
Top reasons Why Businesses Go Bankrupt
In 2019 over 10,000 businesses in the UK went bankrupt. And that was in a pre-pandemic world.
In the US (as with the rest of the world), the picture looked even bleaker in 2020 and moving into 2021. Covid 19 played a role in a number of big US businesses declaring bankruptcy. While in the UK, it is estimated that 900,000 small businesses are at risk of failing due to the pandemic.
Covid 19 aside, there are some other common reasons why businesses go bankrupt.
If a company can’t maintain a positive cash flow and generate enough revenue, it could negatively affect its financial stability. For startups and small businesses, not receiving enough or, worse, any funding from VCs or investors can lead to failure, thus bankruptcy.
And it’s not just funding. Startups need to keep an eye on expenses to make sure they don’t start accumulating debt.
Unwise Corporate Decisions
As a business is about management, making bad decisions and unwise strategies can lead to bankruptcy. It could be a pivot to a new market, manufacturing processes, or focus for a particular goal. Whatever it may be, every decision counts and can affect its stability and position in the market.
Having bad agreements in place or not putting agreements into writing can cause significant legal headaches. Agreements could be with partners, directors and employees.
Since the market is volatile, it’s uncertain what product will boom next, what company will rise, and what type of business will hit a snag. Accordingly, new competitions, failure to adapt to the market, and sudden economic changes can potentially make a business close.
For businesses in the UK, much instability was (and still is) caused by Brexit as businesses and consumers try to navigate any new regulations around trade.
Some startups have already reported significant increases in paperwork due to Brexit.
If a company can’t manage its tax correctly, it could highly affect its financial position. Filing late or inaccurately can incur additional fees and penalties. Lastly, due taxes in the past months can add up.
Accidents like fire, theft, storms and other external causes can, unfortunately, lead a business to go bankrupt. When an accident destroys the office, damages tangible assets, and renders essential tools and machines useless, it can take time for a company to recover. While some can survive with insurance or investor’s help, many will still choose or cannot take action to avoid bankruptcy.
Bankruptcy can happen due to financial issues, market instability, tax irresponsibility, ineffective strategies, and unwanted accidents. While many businesses gave up, others also strived to stay afloat. With careful planning, good market strategy, punctuality, and considerations for the future, a company can succeed and have enough resources to avoid bankruptcy.