#bankruptcy#business finance#z-score

Is My Business Headed for Bankruptcy?

|May 5|magazine9 min read

Written by Tina Samuels 

 

The question of potential bankruptcy is one that unfortunately plagues a number of small business owners.

Even CEOs of large companies fear bankruptcy. Wondering about bankruptcy can give CEOs, owners, and accountants sleepless nights. Worry about finances can put the business owner into a depression or a frenzy to sell off whatever assets they can to try and make up lost revenue.

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You can make a good guess on whether or not your company is headed for bankruptcy based on a few things >>>

Little Revenue

Revenue that is far below what was expected can cause huge problems.

If your business is not bringing in money and you can't pay bills on time, if at all, you're probably headed for bankruptcy. Marketing strategies can help your business turn around, but not if implemented too late.

You must put an effort into marketing your business in order to make enough money to pay off all of your bills and still have a profit. Being unable to keep up with the demands of running a business will put your company into bankruptcy fast.

Put marketing into play as soon as you begin to put together your business. If you cannot afford a marketing department, do the marketing yourself. Research everything that pertains to your business through advertising and use the most cost effective strategies.

Cut the Bills

High bills can ruin a business even if you are bringing in revenue. Profits that end up being spent to only pay the bills aren't going to help you grow. Eventually your company will suffer. Cut down on your overhead by doing as much of your marketing as you can. Thanks to the internet we can learn how to build our brands, market, and even create video on a budget. Technology has become far more affordable. Prices have dropped to the point that even startups can afford to do much of their own, well, everything.

Another way to cut your overhead is to outsource.

Everything from advertising to graphic design can be outsourced to freelance workers. You may choose a single freelancer or an internet based company. Outsourcing is usually much more cost effective than hiring a dedicated team member or adding a new department to your company.

The Z-Score

Several decades ago a prominent professor and scholar in New York named Edward Altman created the Z-Score.

This score was used and is still used today to determine if a company is headed toward bankruptcy. The score is a formula used to predict business failure and/or bankruptcy. The Z-Score has been useful and almost always correct.

This is how the score works >>>

  • Working capital divided by total assets.
  • Retained earnings divided by total assets.
  • Earnings divided by total assets.
  • Retained earnings divided by total liabilities.
  • Sales divided by total assets.

These numbers are calculated and then the results are added together. The result is an absolute number and is called the final Z-Score.

According to the Z-Score, if the result is less than 1.8 then the company is headed toward failure (bankruptcy). This score can be used years ahead of a failure. If your company has a very low Z-Score you can change this by putting more effort into customer care, production, and advertising.

Cutting your costs will go a long way toward improving your Z-Score and ultimately improving your bankruptcy outlook.

 

About the Author

Tina Samuels writes for Reputation.com and has articles on home improvement, health, social media, and small business.