How To Avoid Bankruptcy

Lending money is not an uncommon phenomenon; we would have all done this, to our friends, relatives etc. Imagine a situation where the borrower states he does not have the money to pay back, and further has a legal backing which does not allow you to claim your own money back! This is bankruptcy is in layman terms.

Of course this situation is also applicable to companies, corporate entities largely and typically occurs when the entity finds itself in a position where it is not ‘liquid' enough to pay back its debtors. By claiming bankruptcy, the entity insulates itself for some time and partially, against any legal proceedings per se by its debtors, till as such time the legal system decides how the debtor's outstanding may be settled by the bankrupt entity.

How does one avoid bankruptcy? In the true sense, ‘a million-dollar question' one must admit! From the explanation given above, it is rudimentary to conclude that if any entity (individual or non-individual), strikes the right balance between credit and debit outstanding, ensuring that at no point is the debit position unmanageable, bankruptcy can be avoided.

Sound management of money is the key. Some of the best ways to do it, without sounding patronizing, are enlisted below:

• Always keep an eye on your debts like you would on your newborn. As babies grow, it's quite difficult to keep track of them. It's the same with debts, the more it grows, the more difficult it will be to track it.
• Don't be "pennywise and pound foolish." Cutting corners on power bills, but splurging in a pub - very unwise!
• Be a risk-averse or risk-neutral person, even when your gut instincts will be urging you to jump into the sea to catch and surf the largest wave!
• Be true to your creditors (and yourself, of course) - once you foresee yourself unable to pay an EMI or credit card bill and the reason is genuine - forewarn them. Chances are that honesty as the ‘best policy' may buy you time and suitable restructuring of your debt.
• Last but not the least, insure wisely and ensure you are covered medically and for both movable and immovable assets adequately.

How different are business entities, banks, etc. when the above rules are applied? Not much actually, the basic "rule of thumb" is to watch your debt.  

Let's take a manufacturing firm, producing paper cups. The raw material is paper and has to be sourced from another manufacturer who is, in turn sourcing wood or pulp to make the paper. The cups are produced and sent to various shops to be sold. All this activity typically works on credit, only the time varies. The cup manufacturer takes the paper on credit, the paper manufacturer takes the wood/pulp on credit, and lastly the cup manufacturer sells the cups on credit to the retailer. There is a debtor and a creditor at each and every level of these simple transactions.

If the sales of paper cups dip, retailers will stock less and may stretch the credit period. In turn the cup manufacturer will stretch credit with the paper provider and also reduce the stock. If sales do not show signs of improvement, the cup manufacturer may be inclined to invest in advertising, in a bid to increase its sales. This is an additional expense and if the sale does not improve, the manufacturer is now saddled with debt not only to the paper supplier, but also to the advertising agency. Unchecked, this will eventually lead to a bankruptcy.

Thus, tips for business entities on avoiding bankruptcy will cover:

• Resist from additional expense (advertising, etc.) when the sales are down, and operating margins are thin.
• Inform your suppliers of the existing situation and request for a flexible payment calendar and schedule.
• Work with retailers on increasing demand for paper cups, so that inventory can be sold and money unlocked.

There is no difference in approach for avoiding bankruptcy, either as an individual or a non-individual. Managing your debts prudently is the ‘golden rule.'