Many people think that building a business is easier than working in an office. In fact, there are many risk factors that business owners must face, one of which is when product sales do not meet the target, causing the business to go bankrupt. Reporting from Xendit.co, there are only about 20 percent of businesses that can survive in the first year since launch, and almost half fail in the first five years. As a business owner, of course KH Friend does not want this to happen to your business, right? Therefore, it never hurts to learn from other businesses that have experienced bankruptcy to avoid the same fate. So, what are the common causes of business bankruptcy? How can efforts be made to avoid this? Let’s see the explanation below!
What is Business Bankruptcy?
Bankruptcy is a risk that always lurks in every business. According to KBBI, bankruptcy is a company or shop that suffers heavy losses, draining the company’s assets. But in general, bankruptcy is the inability of a business to pay debts from their creditors. Bankruptcy is actually a common thing in the business world. This is due to failures that occur within the company. Bankruptcy can occur in two forms, namely:
Financial Failure
Bankruptcy due to financial failure or commonly referred to as financial distress occurs when the company is experiencing difficulties with funds, both cash and capital for operational activities. To prevent this financial failure, companies can use part of asset liability management.
Economic Failure
Bankruptcy due to economic failure or economic distress occurs when the company loses revenue so that it is unable to finance its operational activities. This means that the company’s profit level is much less than the cost of capital or the value of the company’s cash flow is less than liabilities.
Indicators of a Business Going Bankrupt
In fact, there are several ways that can be done to predict the potential bankruptcy that a company will experience. Check out some of the potential or signals of bankruptcy below.
- Provide heavy discounts to customers to increase payments as a result of poor cashflow.
- The bank suspended the company’s loans.
- Limited or lack of production raw materials.
- Employees who held important positions left the company.
- Income tax is not paid.
- The company accepts contracts below the standard selling price for cash.
- Increased customer complaints about service and product quality.
Common Reasons Businesses Go Bankrupt and Tips to Avoid Them
Businesses can face serious financial failure and end up bankrupt due to a variety of factors. Here are some common reasons that can lead to business bankruptcy and tips to avoid them:
No Solid Business Planning
When a business lacks proper planning, it can struggle to face challenges and make the right decisions. Without good planning, businesses may fail to properly identify opportunities and risks, as well as establish long-term strategies necessary for growth and stability. Therefore, it is important to create a comprehensive and well-thought-out business plan. Carefully identify long-term goals, marketing strategies, and analyze risks. A good business plan will help anticipate potential problems and establish measures to achieve success on a sustainable basis.
Selling Products at Too Low a Price
While a low-price strategy may attract customers, if it is not matched with efficient costs or sufficient added value, businesses may find it difficult to survive and make adequate profits. Therefore, you need to conduct market research to determine the price of your product that is in line with the value offered and the cost of production. Avoid selling your products at too low a price, which may result in losses or difficulty in meeting operational costs.
Expansion Too Fast
Unplanned and untimely business expansion can lead to a heavy financial burden. Adding new branches or business units without proper preparation and analysis can lead to inefficient deployment of resources and increase the risk of overall business failure. Before expanding your business, conduct an in-depth analysis of the feasibility and risks of the expansion. Ensure that the business has sufficient resources to support growth without compromising financial stability. Consider gradual expansion and careful planning.
Poor Accounting
Improper or poor accounting can cause a business to lose visibility into its financial performance and overall business condition. Without accurate data, businesses may make the wrong decisions or be unable to identify financial problems in a timely manner, which can lead to bankruptcy. You can avoid these mistakes by closing and reconciling your books regularly, conducting internal audits, and using a professional accountant to keep your business records.
Merging Bank Accounts
Merging personal bank accounts with business accounts is a common mistake that can cause accounting problems and make it difficult to keep business and personal separate. This makes it difficult to properly monitor and control business finances and can eventually lead to serious financial problems. In this regard, you need to use separate bank accounts and personal transactions. This will help in managing finances in a more organized manner, prevent commingling of funds, and make it easier to track business cash flow.
The Importance of Legality to Prevent Business Bankruptcy
Going bankrupt is a nightmare for business owners and in fact, both small businesses and large corporations are not exempt from the threat of bankruptcy. What can be done is to avoid and prevent it from happening to your business. In addition to the five factors described earlier, there is an important aspect that determines the sustainability of a business in order to avoid bankruptcy, namely legality. Complying with legality is very important and one of the fundamental pillars in running a successful and sustainable business. When a business does not comply with legalities, various legal and financial issues can arise, which can ultimately lead to bankruptcy. In Indonesia alone, there are several legality documents that must be owned such as deed of establishment, Taxpayer Identification Number (NPWP), Business Identification Number (NIB), Company Domicile Certificate (SKDP), trademark, and other legality documents depending on each type of business. Below, we will explain one by one about the types of business legality documents:
Deed of Establishment
The deed of establishment is one of the documents made by a Notary as the first step to establishing a company, whether a Firm, CV, or PT. Basically, the deed of establishment contains the name of the business entity, capital, type of business field, and the place of residence of the business entity.
NPWP of Business Entity
Another legality that must be owned is the Agency NPWP. NPWP is one of the mandatory documents when you want to take care of other legalities such as company accounts, NIB, applying for capital to banks, and opportunities to get business projects from the government and the private sector.
NIB
The Business Identification Number (NIB) is the identity of business actors used by individual businesses, legal entities, and business entities. Apart from being an identity, NIB also applies as an Import Identification Number (API), Company Registration Certificate (TDP), Trade Business License (SIUP), and Customs Access Rights.
SKDP
Not only NIB and NPWP, business actors are also required to arrange SKDP as a certificate stating that the company has a domicile at the address listed in the SKDP. And keep in mind that SKDP can only be submitted if you already have a deed of establishment.
Trademark
When you decide to go into business, a trademark is an important thing that you should think about. Besides being able to differentiate your business from other businesses, a trademark also makes it easier for your business to be remembered and recognized by your target market and consumers. Well, this trademark must be registered with the DJKI Kemenkumham to legally protect the business and avoid misuse by irresponsible parties.
KH Contact
This is an explanation of business bankruptcy, from the factors that cause it to tips to avoid it. It can be concluded that in addition to business plans, financial management and expansion, legal aspects also play an important role in preventing business bankruptcy. Where, businesses can avoid legal sanctions and fines, protect assets and reputation, and maintain credibility in the eyes of consumers.
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So, are you ready to run a sustainable business and avoid the risk of bankruptcy? Or are you still confused about what processes to do, including not understanding the legality of your business? Take it easy, Kontrak Hukum is ready to help you! We have been trusted by more than 5000 companies in Indonesia to fulfill all business and legal needs, including legality fulfillment such as business entity establishment, licensing, taxation, and intellectual property registration. No need to worry, because only at Kontrak Hukum, you can get the most complete, reliable, and affordable services according to your business needs! For more information, you can visit KH Services – Starting a Business page. Or if you still have other questions, don’t hesitate to ask for a free consultation at Tanya KH and via direct message (DM) to Instagram @kontrakhukum.
