Avoiding Bankruptcy: How Your Business Can Survive a Financial Crisis

September 27, 2015

Despite some reasons for optimism, the world’s economy and financial markets remain in a state of flux. With the upcoming U.S. job report expected to reveal a decline in growth and a struggling manufacturing sector creating a downturn in the Chinese economy, investors and business owners around the world are remaining cautious in the wake of continued volatility.

This underlines the fragility of growth and recovery since the great recession, which has been largely subdued by historical standards. As a result of this, consumer and business confidence remains relatively low throughout the world, while entrepreneurs face an unenviable decision in terms of whether to invest in commercial growth or consolidate for the future.

How to Avoid Bankruptcy and Survive a Financial Crisis

For some business owners, this is creating a short-term financial crisis that is unlikely to be eased anytime soon. With economic instability and financial market trends continuing to drive down sentiment, markets and industries are being weighed down by uncertainty, misconceptions and volatile shifts. Global political unrest and the ongoing Eurozone crisis are exacerbating these circumstances, so it is crucial that businesses look to survive this period until the economy recovers.

Here are three steps towards achieving this: –

Understand the Nature of Bankruptcy as a Last Resort

For inexperienced entrepreneurs and business-owners, it is easy to misunderstand the concept of bankruptcy and its purpose. It is not to be considered as a knee-jerk reaction to short-term cash flow difficulties, for example, nor should it be used to quickly relieve the debt burden accumulated by your business. Instead, it should be considered as a last resort that takes between seven and 10 years to recover from.

So if your business is experiencing a short-term decline on the back of global economic trends and diminishing consumer confidence, bankruptcy is the very last option you should consider. To begin with, there are fixed criteria that businesses have to meet to qualify for bankruptcy, with the minimum debt threshold for firms having recently been increased to £5000 in the UK. Chapter 7 bankruptcy in the U.S. also has stringent regulations, while other nations have their own measures for evaluating your financial circumstances.

It is worth taking the time to research these, as this will give you an insight into the extreme nature of bankruptcy and the terms of eligibility. With this informed perspective, you can also develop a greater understanding of your circumstances and plot a more suitable course of action.

Reduce all Non-strategic costs

Given the direct link between business costs and profitability, your first action should probably be to lower your firm’s annual expenditure. This must be done cautiously, however, as there is little point in cutting costs that result in a declining profit margin. Instead, it is important to understand the difference between strategic and non-strategic costs, as you look to target the latter and save money without impairing business growth.

In basic terms, strategic costs relate to expenditure that creates new revenue from new or existing customers. In contrast, non-strategic costs encompass everything else, and while they are still important they can be lowered without impacting negatively on profit margins. Including administrative fees, office supplies and operational expenditure, these costs should remain the target for any short-term budgetary measures.

Whether this involves outsourcing administration tasks to virtual assistants on an ad-hoc basis or negotiating improved deals with suppliers is entirely up to you, so long as you prioritise sales and marketing costs while continuing to compete aggressively for new work.

Respond Positively and Diversify

Above all else, it is important to retain a sense of perspective during a period of economic stagnation or short-term financial crisis. After all, these events are negative by nature, and a pessimistic outlook can sound the death-knell for your business while also impacting on your employees and physical health.

Instead, it is important to respond in a measured and positive manner. This does not mean reckless spending or the implementation of expansive growth plans, but it should entail a strategic and practical approach to consolidating your business until its fortunes are improved. The aforementioned reduction of non-strategic costs is a good place to start, while you should review your turnover and identify any potential areas for improvement or new opportunities.

Diversification is an excellent response to austerity, for example, whether this enables you to explore new markets or creates additional revenue channels. In terms of keeping costs low, product-orientated firms should consider selling their existing products through an affiliate website, generating additional income for a fixed percentage commission fee in the process.

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