Bankruptcy is a challenging and depressing phase for a debtor. However, businesses do understand that financial debt can lead to bankruptcy, for which they need to design a stable and stronger financial pillar for their business. 

While launching a new business or taking over a running business, the business owner must set ethical and legal financial standards to maintain the balance between the cash flow and expenses. Online billing software for small businesses helps manage and record each little entry associated with finances. 

Businesses having their data records maintained digitally can make sound financial decisions that help avoid depressing situations such as bankruptcy.

What is a small business bankruptcy?

Businesses often face an unfortunate situation during their lifespan where they cannot pay their debts. To seek relief from paying the debts, the entity takes legal help from the court for declaring itself bankrupt. It relieves the businesses entirely or partially from paying the debts to creditors or banks. 

Bankruptcy is an unfortunate decision often initiated by the debtor from getting relief of debts. It is declared public by the court, which directly harms the business’s reputation, including its goodwill, financial, and stock value. 

Why do small businesses go bankrupt?

A small business owner must focus on the success and expansion of the business. But on the other hand, the owner must plan the finances smartly to avoid unfortunate situations like bankruptcy. Various reasons make small businesses go bankrupt in a few years of their lifespan. 

5 Reasons, why small businesses go bankrupt

Running a business is a challenging task. It is not a single person who makes it possible to run it for years. Instead, the complete teamwork of employees and the CEO makes a company successful. 

Being an online billing software company, we have come across many business owners who have been struggling to manage their data, leading to the failure of accurate records leading to debt and other financial frauds. Therefore, we believe every business must have the best accounting software for businesses to manage their business’s financial operations

Here are 5 reasons that lead small businesses to bankruptcy

1. Unmanaged finances

Finances are the lifeblood of any business. However, if you do not have sound hands-on managing finances, hiring the best financial manager to keep an eye on your business’s financial activities is essential. Online billing software for small businesses helps manage your business data, including bills, estimates, expenses, tax reports, time logs, and purchase orders via a single app. Replying to the automated invoicing software for issuing invoices also helps record each sent invoice for demanding faster payments from the clients

Businesses must manage their finances and payment accurately to maintain a positive cash flow from the customers, clients, and debtors. Because unmanaged finances can lead to mismanagement of income and expenses, leading to negative cash flow resulting in more debt. 

2. Increasing expenses

Increasing Expenses

Expenses are subtracted from the income to give an accurate profit value. More the expenses = less the profit. Managing expenses is essential to help businesses understand the overall spending or expenditure. If the expenditure is controlled or managed wisely, it reflects an addition in the profit value, thereby helping companies maintain a good financial position. 

Likewise, increasing expenses can reduce the profit margin. Therefore, a continuous increase in expenses will reduce the business growth preventing the business from success. In addition, reduced profit will lead the company to poor business management resulting in more loans and debt. 

If expenses are recorded daily using online billing software, it can help the business owner download regular expense reports for each quarter or year to understand the major and minor business spending, which can be further controlled. 

3. Many loans or debt

Increasing loans is a matter of concern for any business. As explained above, unmanaged finances and increasing expenses lead the business owner to take a loan from the banks or financial institutions to manage upcoming business expenditures, including salary, purchases, and marketing. 

Small businesses must keep a check on the ongoing loans and plan their business smartly with the best accounting software for businesses. Such accounting apps help a business owner with complete business insights to keep them focused and updated on overall finances. 

4. Money mismanagement

Money Mismanagement

Money mismanagement is another term that refers to money fraud. Utilizing the company’s income for personal or other expenses is one of the examples of mismanagement of business income. Small businesses must invest their savings for future emergencies, which can help them prevent going bankrupt. 

5. Poor accounting team

Last but not least, a poor finance or accounting team can lead the entire business to failure. Conversely, an inexperienced accountant team can never help the business from making sound decisions on new investments, expenses, taxes, and savings. 

Good teamwork helps businesses experience success; likewise, the poor team can be the reason for a complete failure. Hiring an experienced and knowledgeable accounting team can guide the business on saving money while paying more taxes or on the occurrence of undue expenses. 

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How to protect your small business from bankruptcy?

Small business owners must understand that running a business is creative yet challenging. There has to be good knowledge, incredible will-power, and a fantastic team to run a company. If you are experiencing a bad time in business, you must read these essential tips that can help your business from going bankrupt. 

1. Improve your income source

One of the essential elements that help businesses from going bankrupt is having more than one source of income. Here we relate it to projects or clients, or customers. A business owner must plan the income source with all the possible opportunities for maintaining a positive cash flow

More sources don’t lead to the worry of relying on a single client or income. Instead, it helps businesses to earn from various sources, thereby minimizing the chances of increasing debts or bankruptcy.

2. Redefine marketing strategy

There always needs a Plan B ready to incase Plan A doesn’t work. Smart business owners continually redefine their strategies if they think it is not doing any good for the company’s sales or growth. 

So, if, as a business owner, you think that the current marketing strategy isn’t helping accomplish your business goals, redefine the entire strategy. It will help bring good results, thereby ensuring growth and prosperity for your business. 

3. Cut down on expenses

As explained above, increasing expenses cut down the profit value. Therefore, to help your business cherish an excellent profit margin, it is essential to reduce the flow of expenses. Discuss with your financial team about the ongoing business expenses, and try to minimize them by applying some tremendous cost-cutting strategy. 

4. Demand faster payments

Demand faster payments

Poor income flow can lead to an increase in the invoice aging report or the accounts receivable ratio. Hence, businesses need to demand timely payments to experience an excellent cash flow. Free accounting software for businesses also helps small businesses design invoices with payment terms to get paid faster

Moon Invoice, online billing software for small businesses, helps integrate the ‘pay now’ button into invoices for experiencing faster payments. Our billing software for businesses also notifies with payment alerts to get an idea of outstanding payments. 

In short, when the businesses receive timely payments from the clients, the accounts receivable is maintained, thereby helping businesses to enjoy a sound financial condition. 

5. Join hands with resourceful people

Good clients, great employees, and excellent partners are the real assets to your company. If you have great resources in your company, it will help your company manage the worse situations wiser. Most importantly, such resources never let your company reach an unfortunate situation like bankruptcy. 

Hence, wiser people always say that a company defines your success or failure. Therefore, having good resources in your company will help your business keep shining over the years. 

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Also Read: 5 Helpful Tips to Raise Capital for a Startup

Final say!

Bankruptcy is a big decision the debtor makes while there are zero chances of improvement or gain in the financial figures. Therefore, we have disclosed a few ways to avoid unfortunate situations like bankruptcy. Also, businesses must understand that data is the key to making sound business decisions. Online billing software for small businesses is one of the ideal ways to record your business data since its inception.  

Moon Invoice offers a seven days free trial for small businesses. Downloading our best accounting software for businesses will help manage invoices, expenses, time-tracking for projects, expense recording, purchase order management, business insights, client management, and stock alerts via a single screen. Connect with our experts to know how your business can track all financial activities with Moon Invoice.