It is imperative that you monitor your company’s finances periodically to identify if your money is running out and you’re on the verge of crisis. Such monitoring always helps you prepare well and take timely action to avoid a financial debacle.
Financial problems due to a deficit cash flow or aforeign exchange risk should not necessarily mean bankruptcy for your business. You are good as long asyou detect these issues on time and take instant remedial action.
Ever wondered why more than 25 percent of companies in crisis are unable to recover? It’s not because of the severity of their problems, but because they don’t recognize the problems and act in time to avoid bankruptcy. Many entrepreneurs panic at this point and opt for unsecured business loans. Unfortunately, such an impulsive decision backfires in most cases.
An entrepreneur who focuses only on sales figuresmay neglect other indicators that could affect cash flow and put a fragile startup at risk.
For instance, the volume of sales may increase but there might not be enough capital or financing to increase production capacity to meet demand.
Even if you financeit on time, your investment may not recover in time, which could also affect the supplies and production.
Keeping yourself well informed is one of the most effective ways to tackle any financial crisis that your startup may face. However, you must know where to look. That’s why we’ve come up with these five key things you must ensure to stand strong against any money crisis.
Identify the problems
A report shows how you should start by having a clear picture of all the financial data of your startup – apart from helping you analyze your financial statements, itwill help you find the answers to these questions:
- At what level is the financial break-even point of your business?
- How are sales prices and costs expected to show in the next six months?
- How much is the contribution margin of the products that make up 80 percent of sales each month?
- How much is your working capital?
- What are the recent variations in sales and how do they compare to the same period a year earlier?
- What were the gains in the most recent accounting period? If so, how were they invested? If losses were recorded, how were they financed?
- What’s the contribution margin generated by customers representing 80 percent of the sales volume each month?
- Where is the average contribution margin in the same period and compared to the previous year?
- Do you know how to cover your financial obligations in the next year?
These are the signs that you must identify to recognize a financial crisis (the sooner the better):
- You have had trouble making payments to your suppliers, your tax obligations or your social charges.
- You have sought to restructure your debts with financial institutions to reduce monthly payments.
- You have compromised your property and machinery as a credit guarantee.
- You are facing a market contraction and your sales are not growing, and they are even shrinking.
- Your profit margin has been reduced compared to the previous year and you are not reaching your financial break-even point.
Position your company
If your crisis is due to a period of generalized economic recession, it could be somewhat beneficial. The crises serve to clarify the markets, making theless competitive companiesthat have a certain market presence disappear. That way, you can take advantage of other companies quitting to capture their customers and keep more market shares.It will significantly improve both your visibility and position in the market. Otherwise, you might want to look further into the following measures:
You can reduce expenses by ensuring proper inventory management. You can even reduce advertising expenses through better exploiting social networks and their more economic campaigns. Social media will allow you to reach a greater number of people – eventually, it may have a positive impact on sales.
Plan the crisis and study possible synergies
One of the most important strategies, when you’re facing a financial crisis, is to learn to plan it.You can do it by creating a crisis management plan. Having a calm mind and knowing how to mitigate its intensity, its duration, and itsimpact will help your startup. You will be able to overcome crises more easily and calculate the capacity of your business to cope with it. In addition, after moderately controlling the situation, you can establish an action strategy and make vital decisions to minimize the negative impact of the crisis.
In times of financial insecurity, you may be interested in creating alliances with other companies with the same business model as yours. We’re not talking about selling your startup – you can share expenses and market share to benefit from it and share profits. Also, another truly interesting alternative is to get a partner who is committed to your company. It would help you overcome certain economic problems within the business and get out of them stronger.
Focus on your business
In times of crisis, focus on your business and not the environment. The environment is not the determining cause. It is only the means to adapt.You will need your company to have the adequate capacity to adapt. At this time, you will have to perform an analysis of your business and identify what are its weak points that you must correct.
A startup with buoyant numbers and figures must stay informed. Information is power and is the most important asset that you must have. Study the market, its news, trends, your competition – andalways stay on top of your game.
Avoid bankruptcy of your startup
In a crisis, you just can’t waste time and you must act to save the day. Identifying what exactly has caused the crisis will set the tone for what you should do – either mitigate or shut it down to start a new onebefore the losses sink you even further.
If your business faces bankruptcy and you must decide if it is worth saving, these are the steps to follow:
Evaluate the financial reality of your company so you can make informed decisions. Focus on your liquidity, profitability, and level of indebtedness. All of this will indicate if you are in a position to meet your immediate commitments, make a profit and pay your financial obligations. It involves preparing your current financial statements and consideringyour available assets. You also consider how much your income is and what your profit history has been.
By having a panoramic view of the financial situation of your business, you must make an informed and reasonable decision about whether it is possible to save it or not.
If you continue, you must design a strategy that establishes how much the investment you need to capitalize on the business. You also answer some important questions, like where you will look for it. You plan the actions you will take to save costs, increase income to improve your cash flow. If the decision is to shut down completely, you should also plan how to do it responsibly for both your employees and investors and creditors.
In a Nutshell
Having your startup on the verge of bankruptcy is always a big hit, but if you’re already in this situation you must analyze it calmly and make timely and courageous decisions. That’s the only way to either rescue a sinking ship or to just jump out of it alive.
It won’t be easy, but that business you worked so hard for deserves that kind of effort.You’ll need to understand the signs of a financial crisis. For instance, sales may decrease exponentially over a month when it’s not low season stage of your business model.
One of the most determining factors when it comes to running a new company is economic stability. Being an entrepreneur when the situation is positive and favorable in the business is easy. The real challenge is when the numbers don’t add up, or when you see significant mismatches in the income and expenses binomial – this is when an entrepreneur is tested and faces the real challenge of making vital decisions.