Bankruptcy risk: how to detect it?

The risk of bankruptcy can potentially affect companies that are poorly managed or that do not plan to face possible problems in the external environment. A company can become insolvent for a variety of reasons, but filing for bankruptcy is a lengthy procedure. It is not the product of chance, nor does it happen suddenly.

As a matter of fact, one can even predict the number of bankruptcies when it is regarded as a macroeconomic indicator, since it signals a problem with the economy.

What is bankruptcy before the law

Although it is the culmination of an eminently economic process, bankruptcy itself is also a legal institute. In a broad sense, this means that the company does not have the capacity to pay its obligations and generate results that would enable the reversal of this scenario.

In the legal sphere, a company is not bankrupt until it makes its bankruptcy official in the legal sphere. When a PJ exposes its inability to pay its debts and remain economically active, it also seeks legal support to avoid the attachment and seizure of assets by the Judiciary. Furthermore, only by declaring bankruptcy is it possible for a company to resort to Judicial Recovery .

Signs can anticipate the insolvency of a business

The inability to keep a company active is not a sudden phenomenon. Until it reaches the judicial sphere, a series of problems and failures must occur repeatedly, culminating in bankruptcy. Some signs can be noticed when the risk of bankruptcy is imminent.

Excessive outstanding debts

Debt insolvency is the indispensable condition for a company to declare bankruptcy. When it finds itself unable to honor its commitments with its creditors, a situation arises in which the continuity of operations is no longer possible.

Therefore, it is necessary to close the activities and liquidate the remaining assets. In some cases, partners may have to help pay debts with their respective assets.

A good preventive tool against the chaos of open debts is to carry out tax planning at the beginning of each year, to analyze the possibilities that your company has to reduce the tax burden based on the law and adjust internal tax and accounting processes before proceeding. inspections.

Likewise, business consultancy can put your business on track. Because, through multidisciplinary professionals, it is possible to identify and adjust unproductive gaps in each of your business activities. A poorly organized and structured process harms the team, the quality of the service and, above all, the financial result.

Hence it is worth highlighting the importance of a zero-based budget to balance the company’s production process and eliminate all unnecessary expenses, which certainly contribute to generating debts with suppliers and the tax authorities.

Loan dependence

The debt snowball is directly related to the unhealthy practice of taking out loans to pay bills. Requesting credit, in some companies, ends up becoming a kind of “addiction” for their managers due to poor financial management.

At this point, strategic financial planning combined with a flexible and effective business budget will ensure that not only do you have total control and control over your finances, but you will also know all the expenses and costs of each activity, and the impacts of each one on the generating revenue for a given period, including determining goals for the company to grow based on objective numbers.

As there are corporate types in which the partners’ personal assets are shielded from liability in the civil sphere for debts incurred, irresponsible behavior ends up finding fertile ground to proliferate. Thus, successive loans accumulate and, with them, interest, fees and all related obligations.

Labor liabilities

Another unequivocal sign that a company is about to fail is the accumulation of cases in the Labor Court.

Labor liabilities, as it is also known, represent a serious institutional problem. In addition to expenses with compensation, legal fees and court costs, there is intangible damage to the company’s image, which is much more difficult to repair.

Here, one way to reduce risks with labor debts and labor court actions is to have preventive legal advice . Many business owners mistakenly only worry about hiring this type of consultancy after the damage has been caused.

It should be noted that the very existence of processes already indicates that the company does not ensure compliance with the laws, which is ultimately a sign of poor management.

Detail: after the labor reform , according to the Superior Labor Court, the number of cases fell by almost half.

Always insufficient working capital

Maintaining a productive activity generates costs . Suppliers, salaries, taxes and electricity and water bills are some of the common expenses for companies, which have working capital as their main source of financing.

Many entrepreneurs believe that for the business to remain active and healthy it is important to focus on generating revenue. However, what normally harms the financial result, as a result of disorganized and uncontrolled management, are expenses. Expenses must always be reviewed and only those that are essential for the proper functioning of the enterprise must be continued. Without this, the natural outcome can only be bankruptcy.

Insufficient working capital is also the reason why companies become dependent on borrowing to finance their activities, which, as we have already seen, is another indicator that insolvency is on the horizon.

Lack of financial control mechanisms

All companies that fail have another type of absence in common, that of effective financial control mechanisms.

After all, it’s one thing to do random bill calculations once a month, just to check if the bills can be paid. Another is to maintain up-to-date accounting records on finances that allow you to anticipate results in the medium and long term.

In short, staying financially healthy is not just about picking up the calculator when paying off your debts, but controlling everything you earn and what you spend on a daily basis.

Low profitability and liquidity

Insolvent businesses also have a recurring characteristic, the low profitability of their assets and the low liquidity of their assets.

When paying debts, it is essential that assets can be converted into cash in time to ensure debt settlement. What’s the point of having a poorly maintained property, since it can’t be used to pay what you owe?

Or, even worse, if this low liquidity asset is not profitable, it becomes even more difficult to pay the debts, due to the little value it presents.

Actions that can be performed to prevent the worst

A financial crisis is not just a sign that something is wrong. Depending on the stance that partners and managers adopt, it could mean an opportunity to reevaluate their methods to start over in the right way.

Therefore, the first measure to be adopted when the risk of bankruptcy is detected is to act with complete honesty and transparency. Problems must be faced head on in order to find the ideal solution.

Once the debt is recognized and mapped, it will be time to work on debt renegotiation. For a creditor, it is better to receive something than to receive nothing. Therefore, a round of negotiation may be the chance to reduce the risk of bankruptcy, by reducing part of what is owed or even paying the remaining balance in installments.