Common Causes of Business Bankruptcy: Explained

Common Causes of Business Bankruptcy: Explained

In 2022, 13,125 businesses filed for bankruptcy in the US. Despite that high number, it’s actually a decline from previous years. As a business owner, the last thing you want is to get to the point where you need to file for bankruptcy. 

This is a sure sign that your company is failing, and while you don’t necessarily need to shut down, it makes operating more challenging. But how do you get to this point? Keep reading, and we’ll look closely at the most common reasons for business bankruptcy. 

Economic Recession

Decreased consumer confidence during a recession has a significant impact on companies. As people become worried about their personal finances and the economy’s future it can lead to less spending. This can hurt businesses and lead to the need to work with companies like Powell Associates as you work to consolidate debt or file for bankruptcy. Unfortunately, there’s only so much planning you can do regarding a recession. 

However, educating yourself on what causes financial problems during a recession can help. Knowledge will give you the tools you need to tackle problems head-on instead of burying your head in the sand. 

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Poor Financial Planning

Are you guilty of poor financial planning? If you’re not sure, ask yourself these three questions: 

  1. Do you have enough cash on hand to cover expenses? 
  2. Is your budget realistic? 
  3. Have you diversified your income sources

Here are some tips to help you ensure you’re being smart when it comes to financial planning:

  • Have a realistic budget that takes into account all of your income and expenses
  • Have enough cash on hand to cover your expenses, especially unexpected ones
  • Diversify your income sources 
  • Keep track of your spending and be mindful of where your money is going

Unforeseen Circumstances

Sometimes unforeseen circumstances can contribute to business bankruptcy. This can include anything from a natural disaster to an economic downturn. This will ultimately reduce the amount of money you have coming in. It’s important to note, that part of this is a lack of planning. Realistically, you can’t plan for everything. 

But, there are steps you can take to help protect yourself in case of unforeseen circumstances. This includes having the right insurance. One type of insurance you might want to consider is business income insurance. This insurance helps cover bills if disaster strikes and you can’t run normally. 

Poor Marketing

Businesses that thrive during recessions are the ones that understand the power of SEO and marketing. Unfortunately, many don’t invest enough in marketing, or they don’t have a good marketing strategy. 

As a result, their sales suffer, and they eventually go bankrupt. If you’re not sure how to market, there are plenty of resources available to help you get started. There are also many companies that specialize in helping everyone, from startups to corporations, with their marketing efforts. 

Poor Management

Not everyone is good with money; however, it’s important to know if that’s you. Knowing your shortfalls in the areas of finances can help you address them. For example, you could hire a consultant or accountant. 

Not addressing your finances properly can lead to many problems. These problems can arise due to several reasons. 

  • Financial mismanagement can include things like overspending, not keeping track of expenses, and making bad investment decisions
  • Poor decision-making can also lead to financial problems
  • A lack of oversight: If there’s no one watching over the day-to-day operations, it’s easy for things to fall through the cracks

Fraudulent Activities

Fraudulent activities can not only hurt your bottom line, but they can also lead to the need to file for bankruptcy. If customers catch on that, you’re engaging in fraudulent activities; they’ll stop buying. In addition, they may ask for refunds and report you to the authorities. 

Fraud can include many things:

  • Misrepresenting yourself to gain an unfair advantage
  • Selling faulty products
  • Overcharging for services
  • Embezzling
  • Money laundering

It’s important to ensure that your employees are on the up and up. You also want to make sure that you’re not engaging in fraudulent activities yourself. In the end, it will catch up with you. 

At that point, you’ll not only face bankruptcy, but you could face jail time as well. 

Keep Your Finances on Track and Avoid Bankruptcy  

It’s important to be aware of the common causes of business bankruptcy. This will allow you to take the necessary steps to avoid them. Cash flow problems, inefficient bookkeeping and budgeting practices, lack of strategic planning, and too much debt are all pitfalls that must be avoided for your company to succeed. 

A combination of understanding your risks as well as seeking professional guidance from financial advisors or accountants is often recommended if you’re looking for long-term success.