business.com receives compensation from some of the companies listed on this page. Advertising Disclosure
Home

How to Keep Your Business Out of Bankruptcy

Matthew Debbage
Contributing Writer
business.com Contributing Writer
Updated Jan 23, 2023

Managing your debt and cash flow is critical to avoiding bankruptcy.

Bankruptcy filings continue to fall for businesses — in 2021, 16,140 businesses filed for bankruptcy, reported the United States Courts. This was down about 28 percent from the previous year, largely due to an increase in government assistance during COVID.

The inability to manage debt and cash flow are the primary drivers of bankruptcy. So if you want to run a profitable business and avoid the missteps that can lead to bankruptcy, this article will provide some actionable steps you can take. 

Strategies to avoid bankruptcy

Protecting your business against debt can save you from bankruptcy and spare the overall economy from the fallout. Let’s look at five tips to get your debt and cash flow management on track.

1. Pay your bills on time

Don’t give yourself a reason not to pay your suppliers on time. If you aren’t making timely payments, you’re unnecessarily straining those relationships and slowly building up debt. Further, if you get too far behind on payments, your supplier might freeze services to your business altogether or even take you to court. 

Your business credit report will suffer if this happens, which will put you that much closer to bankruptcy. If you foresee any problems fulfilling your payments, be honest with your suppliers. Ultimately, it’s in their best interest to help you so they can ensure payment and your business in the future.

TipTip: As a business owner, it’s crucial to keep accurate financial records for your company. The best accounting software lets you invoice clients and track your expenses and cash flow management.

2. Pay your taxes

The last thing you want on your credit report is a tax lien. If potential vendors see that you’re not paying what you owe the government, they’ll likely assume that you won’t pay for their services either. 

That doesn’t mean a tax mishap is a death sentence for your business, but you don’t want the issue to snowball — and with the government, tax problems can do that quickly. If you get off course with your taxes, be proactive. Set up a payment plan, and stay on good terms with the IRS. 

3. Learn to use credit reports

Credit reports, both your own and those of your customers, are a vital tool for your business success. Start by studying yours to determine where you stand. Potential customers and lenders will look, and you want them to be impressed with what they see.

A credit report is also essential when you’re onboarding a new customer. If a customer’s report raises red flags, you might want to think twice about doing business with them.

4. Have a cash reserve

Even your best customers can run into financial difficulties. If you monitor their credit reports regularly, you can see early warning signs and work with them to change their payment terms or make other arrangements. 

If they do face a financial downfall, you want to be prepared and have the cash on hand to weather the storm. Plan ahead and add what padding you can to your reserves. The best business owners are ready for the worst case scenario.

5. Build strong relationships

There is a common factor in each of the previous four tips above — relationships. It can be difficult to cultivate relationships in the world of finance and credit and is even harder in a B2B enterprise. But building relationships can be the single biggest factor in your organization’s successful avoidance of the bankruptcy domino effect.

Knowing your suppliers and the organizations you supply, their habits, the points of contact and their financial history goes a long way in overcoming issues. Being able to send an email or make a phone call to clear up any confusion or answer any questions can be vital to a proper understanding of a situation.

If things do become problematic, a relationship can help make hard conversations a bit easier and lead to a plan of action going forward. Further, it can be instrumental in minimizing the potential damage caused by an unavoidable bankruptcy.

FYIFYI: It’s important to reach out for help as soon as you notice signs that your business is in financial distress. The right financial and legal experts can help you come up with strategies to get your company back on track.

Bankruptcy warning signs

It’s impossible to predict the exact scenario that will cause a business to file for bankruptcy, but there are some common warning signs to watch out for. If you’re concerned that your business or a vendor is headed down the wrong financial path, here are some things to watch:

  • Changes in payment behavior: It’s a major red flag if a business has suddenly stopped making payments to its vendors or utility providers. While some businesses simply have a habit of paying their bills late, it’s almost always a bad sign if they aren’t paying for water, electricity or gas. This is by far the more predictive factor in business failures and indicates a real-time, looming cash flow problem.
  • Tax liens: If companies don’t pay government taxes, these liens can add up quickly with local, state and federal entities. Government agencies will always be the first in line to get paid from the liquidation of a failed company’s assets, leaving you with nothing or a few cents for each dollar owed.
  • Court judgments: If a business is taking another business to court for unpaid bills, it might be indicative of a cash flow problem. While this is not always the case, businesses should see this as a red flag and investigate further. Keep a close watch on this business, as it might already be on the path to bankruptcy.
  • Prior involvement with failures in other companies: If company owners have been involved in previous bankruptcies, especially recent ones, this typically increases the chances of future insolvency. A business owner who was part of an organization that went through bankruptcy is more likely to see history repeat itself.

If enough of these factors exist, the likelihood of bankruptcy is fairly high. Keep in mind that when a company goes bankrupt, it doesn’t do so in a vacuum. The effects of one bankruptcy ripple through the whole economy and cause a chain of others.

The bankruptcy process is long and tiresome and not something any business wants to endure. While there is no absolute cure for avoiding the effects of bankruptcy, sound financial practices are just as important in good times as they are in bad, and proactive debt management has always been a critical part of that equation.

Additional reporting by Jamie Johnson.

Image Credit: NaMaKuki/Shutterstock
Matthew Debbage
business.com Contributing Writer
business.comb.
Matthew Debbage is the COO of Creditsafe Group and the CEO of Creditsafe USA. He has been responsible for Creditsafe’s international expansion across Europe, Asia, and the U.S. Matthew has been building a career in business intelligence and company credit management solutions for more than a decade and has developed global expertise along the way.