Any business can encounter financial distress in turbulent economic times. When a business finds itself falling behind on its taxes, insurances , trade debt and other obligations this creates financial distress. Does that mean that it is the end of the business? No, there are several ways in which businesses can deal with the crisis and improve their financial situation. In fact, financial distress is an integral part of a well-functioning market as it results in different outcomes like a successful turnaround, acquisition by another firm or piecemeal sale of assets and winding up of the business.
Handling Financial Distress
There is no readymade solution that can be used to help businesses overcome financial distress since each one of them has a unique identity and the reasons causing the problem vary. This requires developing a strategy that considers the reasons for the distress, the factors that are contributing to it, the costs involved and the overall situation.
Ways for a Business to Overcome Financial Distress
Distress could be a result of mounting debt or liquidity issues arising out of faulty marketing strategies. Cyclical or operational issues can also lead a business into financial trouble. Some ways in which businesses can overcome financial distress are:
#1 – Make Budget Revisions
The priority is to get back in shape. A business can look for ways to improve the financial situation, such as reviewing expansion plans, shelving plans to hold expensive events or cutting down the marketing budget.
#2 – Evaluate Sales and Promotion Strategy
Measure and monitor every aspect of the marketing mix. Evaluate your sales and promotion strategies to determine which are yielding results. Trim those that do not have healthy returns on investment. This can be challenging, as a significant reduction of the marketing budget can impact sales and profitability.
#3 - Review Costs and Improve Cash Flows
Identify costs that can be reduced without significantly affecting the business. Negotiate with suppliers and other vendors for extensions. Delay the replacement of equipment. Cut down non-essential staff. Increase the level of management authority required for approving purchases. Apart from cost saving, you can improve cash flows by regularly following up with clients for payments. You can also improve liquidity with invoice financing.
#4 - Find New Investors
Getting your business back in shape sometimes requires an injection of funds, but be careful not to get yourself in a situation where you are tacking onto already mounting debt. If additional capital is likely to turn around your financial woes, you can consider applying for a short-term loan for small businesses. Consider meeting angel and private investors. Try crowdfunding platforms.
#5 - File for Bankruptcy
Financial distress does not happen overnight. It is a gradual process with several warning signs indicating that things are deteriorating. Although never an easy thing to do, it is important to recognize when a business may be beyond the point of being able to turn things around and get its finances back in order. Consider consulting a bankruptcy attorney to help evaluate your particular circumstances and make a decision. Bankruptcy involves the restructuring of debt or liquidation of assets to be used to pay off creditors. While Chapter 11 bankruptcy is the most common form of reorganizational bankruptcy for companies, Chapter 7 bankruptcy is often most suitable for small business owners. The benefits include:
An automatic stay that prevents most creditors from taking any steps against your business except through the bankruptcy process.
Foreclosures, tax sales, repossessions, utility shutoffs, lawsuits, and all other creditor actions to be stopped.
Stop debt collection harassment, wage garnishment and other creditor actions to collect a debt.
Allows you to challenge the claims of creditors who are trying to collect more than what you owe.