According to a study by Graydon, 40% of bankruptcies can be prevented. This is a shockingly high percentage, and therefore it is worth looking at how one can avoid bankruptcy. According to the research, several reasons lead to bankruptcy. In this blog, I discuss the three leading causes, and we look at what you can do in advance to prevent them. Thousands of companies go bankrupt every year. This can result from an economic crisis or a sharp decline in the market, but often the cause of the bankruptcy lies within the company itself.
Incompetent entrepreneurship (27%)
The most significant cause of bankruptcy is incompetent entrepreneurship. Insufficient knowledge of the entrepreneur, little experience, no diplomas, no thorough preliminary work, too locally focused or uncompetitive; there are many reasons why an entrepreneur cannot keep his head above water. Without explanation, most failing companies are younger than four years old, and most entrepreneurs that go bankrupt are younger than thirty-six. A necessary precaution is to seek advice in those areas where you fall short. However, this requires some degree of self-knowledge and self-reflection. It is also wise to talk to customers, suppliers, other entrepreneurs, and specialists in your field. As an entrepreneur, it is necessary always to remain alert. Last year, a successful product or business model may now be outdated due to new developments. Therefore, keep a close eye on what is happening in your field of work and make sure you keep up with all products. By continuing to innovate, you prevent your company from becoming obsolete, and you ensure the continuity of your company.
Lack of understanding of the market is a common reason companies go bankrupt.
To keep your business running, you must understand your competitors, customers, and market trends. If you do not keep up and your competitor does, it can cost you a lot of customers and eventually even lead to bankruptcy.
The most significant cause of bankruptcy is incompetent entrepreneurship.
Business reasons (18%)
The leading cause here is poor administration and lack of effective debtor management†. In short: the customers do not pay or pay extremely late, and you do not notice it. To please customers, overdue payments are often covered with the cloak of love. However, it is essential to have a good insight into your customer’s creditworthiness and payment behavior. You can pick up signals from changes in payment behavior, which indicate that your customer is not doing well. In addition, part of the cause for this often lies with the entrepreneur himself. Send an invoice on time, charge interest on delinquent payments, and send reminders immediately when the payment term has expired; there is often still a world to win.
Many entrepreneurs know what their cost is. However, it is imperative to know that. This applies to companies that make or sell products, but certainly also to companies that provide services. If you do not see the cost price for your product or service, you also do not know to what extent your company is profitable. Without insight into your cost price, bankruptcy can happen without you noticing it.
Financing problems (15%)
Problems with financing often arise in companies that are already not doing so well. Banks have tightened the reins since the monetary crisis and want the extra security of the funding. When a company is already in trouble, not getting enough financing is often the death toll. An entrepreneur can prevent this by committing to the budget for a longer time in good times, ensuring there is always some room for setbacks, and delving into the different forms of financing. To increase as an entrepreneur, capital is needed. The bank often provides wealth in the form of a current account area. These are short-term debts. However, these debts are often used for far too long, so entrepreneurs must deal with high-interest rates and financing costs for a long time. Instead, you want to pay off your current account as quickly as possible.
Other causes of bankruptcies are still fraud (11%), personal circumstances (9%), competition (6%), and outdated business operations (5%).
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