Mistakes made in business can often turn into insolvency risks for your company. However, you can steer clear of insolvency if you avoid these mistakes. Many years of experience show that insolvencies and bankruptcies are often avoidable. If business owners get advice fright from the start, they can prepare for many typical mistakes and avoid them.
Starting a new business is hard work. Sadly, many fail. When this happens, Many companies naturally fall into liquidation, but this does not have to mean the end of running a business. The process of liquidating a company is a good time to properly look at your books and pick out the details of areas that big mistakes leading to insolvency risks were made, such as prioritizing the budget wrong so that tax bills were not paid off because you were paying for too many expensive staff from an agency.
At the same time, it can be said that there is seldom a single factor that is decisive for insolvency risks and the bankruptcy of a company. There are often several insolvency risks that lead to a crash of the company. With each of the following 13 insolvency risks that apply to a company, the risk of bankruptcy increases sharply. The 13 identified insolvency risks are taken from a study by the “ Center for Insolvency and Reorganization ” at the University of Mannheim.
Avoid these insolvency risks
1. Lack of control and planning
Controlling, i.e. the planning, coordination and control of company processes, is neglected by many founders, especially when they are busy with day-to-day business. The regular formulation of clear goals with regard to time frame, effort (cost accounting) and quality of the results helps here. The goals defined should:
- be specific, i.e. being unambiguous,
- be objectively measurable,
- offer an incentive to achieve the goal, for example financially,
- be realistically feasible and provide a clear period of time until the goal is achieved.
So, set goals and regularly check whether you are on the planned path or are in a dead end.
2. Gaps in corporate finance
The financing of the company with capital is from the outset a crucial issue for start-ups. Financing with outside capital via bank loans can result in high interest payments, especially if your creditworthiness is low. Financing through the sale of shares, on the other hand, can disrupt the shareholder structure and make important decisions more difficult. Always keep an eye on your liquidity and find out about alternative financing options such as mezzanine capital.
3. Inadequate receivables management
If your customers show a half-hearted payment behavior, you are no exception. More and more operators, especially in online trading, but also in other business areas, are reporting long waiting times for incoming payments. This can seriously endanger the liquidity and thus the existence of a small or medium-sized company, and ranks high among insolvency risks. If you give your customers a payment term, you should also operate a forward-looking receivables management . For example, corresponding regulations such as retention of title in the terms and conditions can offer you more security here.
4. Deficiencies in leadership style
The management style of the managing directors and senior employees has a direct impact on the productivity of the employees. Above all, a leadership style that is too rigid, in which the supervisor wants to control and influence even the smallest processes of the employee, stifles enthusiasm, creativity and motivation in the bud. A poor management style poisons the atmosphere in the company. A leadership style that is too casual can also have a negative impact. Good leadership, on the other hand, can be an incentive for top performance.
5. Communication problems
Everyone has made mistakes in communication. But this should be avoided as far as possible, especially in companies. Communication is the key for the different areas of the company to work together. Information and know-how should be passed on between departments. Every employee should know his or her contact person and should be able to ask questions and give suggestions on a regular basis. External communication with customers and business partners is even more important . Always inform in good time of changes, delays or problems. Also, ask about customer satisfaction on a regular basis, this information can be crucial.
6. Investment failure
Investments involve risk, but are necessary for growth and innovation. The decisive factors are the volume and timing of the investment . In order to be able to make the right investment at the right time, in addition to an entrepreneurial flair, you primarily need information. Small businesses often do not have the resources to do extensive market research. But market analyzes and customer surveys can be carried out with little effort. You should also consider renting instead of buying before making a major investment so as not to affect your liquidity.
7. Incorrect production planning
A wrong production or service planning has strong negative effects, underutilization in the first place. The reason for this is often a lack of market observation or a lack of reaction to trends in sales development. A company with poorly organized production processes often relies on outdated technologies and systems and therefore manufactures inferior or overpriced products. In the service sector, this is reflected in excessively high personnel costs. Make sure that you offer a balanced range in which your “ cash cows ” do not have to subsidize too many weak products.
8. Incorrect prioritization
For a successful company, it is important that the main motivation lies in the company’s well-being . Your personal and corporate goals should match. Personal conflicts between shareholders can seriously damage the company. You should therefore ensure that the articles of association are drafted in a forward-looking manner. If possible, short-term planning should always be in line with the strategic objective. Don’t throw principles overboard in order to satisfy individual, albeit important, customers. Before making any decision, ask yourself which solution will bring you closer to your long-term corporate goal.
9. Changed market environment
Change is ubiquitous in business. Many entrepreneurs react too late to a changed market environment , for example the challenges of globalization and digitization. Digitization also offers many retailers great opportunities, for example through online shops and sales portals. It is important that your products optimally satisfy customer needs. Therefore, always have an open ear for the wishes of the customers and adapt your price and product policy to the current situation.
10. Self-centered point of view
Founders and entrepreneurs often lose sight of the essentials when faced with the large number of decisions to be made . In insolvent companies, there is often a feeling of omnipotence among the people involved right up to the end. As an entrepreneur, you are not omniscient, you don’t even have to be. The ability to delegate and trust your employees is important. Successful entrepreneurs develop an intuition as to which statements from employees and customers are important and which they can trust. An egocentric perspective blocks the view of dangers and opportunities.
11. Short-term decisions instead of strategic planning
In insolvent companies there was often no person released from day-to-day business who could make strategic considerations and discuss them with management. Decisions are then often made in terms of short-term successes, but are not sustainable and tend to be harmful in the long term. For example, a change of supplier leads to a lot of effort in the short term if well-established delivery processes have to be changed. In the long term, however, this can result in great savings. So do not spare any effort if you think that you will be able to achieve long-term positive results with it. If short-term decisions have to be made for financial reasons, this is a sign of insufficient liquidity and financing problems.
12. Mistakes in human resource management
Many insolvency risks that lead to company bankruptcy are made in human resource planning. For example, the workforce should also reflect the sales figures, which means that you should be able to react flexibly to a decline in sales. Contracts with freelancers , for example, are suitable for this. Low employee motivation and conflicts among each other are further causes that damage the company. Lack of identification of employees with the company often leads to a high level of sick leave. This can be prevented through an attentive personnel policy. Too many changes in management also create uncertainty among employees. Therefore, make the right demands on newly hired employees andavoid frequent changes in company areas that are of interest to investors, investors or customers.
13. Uncontrolled expansion
Mistakes that become insolvency risks are often made when expanding and investing. These are also often momentous. Insufficient investment leads to outdated products and services that cannot be sold. Premature investments increase costs and therefore also make the products unsaleable. Also pay attention to adapted distribution channels and correctly assess currency risks and risks of cooperations and investments. If necessary, seek an assessment from management consultants before entering into or cooperating with a company.
Seek expert advice on insolvency risks
When there is an area of expertise that isn’t your expertise, bring in someone else to look after it for you. If even after figuring out what budgetary insolvency risks you made contributed to the demise of your last business, it’s still too hard for you to manage, bring on an accountant to take care of the company books for you. If your advertising campaigns are somewhat lackluster and failing to draw in as many customers as expected, again go to a marketing expert and let them bring in the customers. Outsourcing in this way not only shows that you can admit you now know when to delegate, but it will also free you up to concentrate on the parts of the business that are your expertise, thus providing a better service and a more reliable company.
Conclusion
Admitting you are at fault with insolvency risks is a massive part of the learning curve, so if something repeatedly hasn’t worked out in your business strategy, take a step back from it and reassess how you should be approaching it so that it can be made to work effectively to the benefit of your business needs, or be dropped altogether. For example, if your stock inventory never matches up with the actual incomings and outgoings of stock, reassess your inventory stock checking program to see if it can be improved or if human error is the issue and further training needs to be given.
Nobody likes to make mistakes or sets out to make them, but they definitely will happen at some point; but rest assured that you can learn some powerful lessons from making mistakes in business and come back in a much more powerful and knowledgeable position. But the insolvency risks do not have to haunt you for the rest of your career if you learn from them so that you don’t repeat them in the future.
