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small business financial crisis

Your Business Faces a Financial Crisis. Now What?

When an entrepreneur starts a small business, the sky’s the limit. Just about every thought has to do with growth – how to improve product, step up marketing, tighten up sales strategies and find the right financing to prosper.

What entrepreneurs typically don’t think about is their business ending in bankruptcy.

Unfortunately, though, roughly 20% of small businesses fail within their first year. Almost half are gone within five.

Sometimes, events far beyond your control can end up determining the fate of your venture. Your businesses might very well face a financial crisis, like many did during COVID. The following are a few ways you can try to stave off closing, and more information about bankruptcy in case you have to go that route.

A Few Steps for Businesses Facing a Financial Crisis

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually, then suddenly.”

These lines from Ernest Hemingway’s The Sun Also Rises reflect the way many businesses find themselves in financial trouble. The truth is, with few exceptions (such as COVID measures sending some businesses to a screeching halt), most bankruptcies occur thanks to problems that grow over time … but naturally, once a company actually has to file for bankruptcy, it feels quite sudden.

Your best bet is to be constantly financially vigilant. But if a financial crisis “sneaks up” on you, here are a few things to consider immediately:

  • Cut all nonessential costs, and reduce essential costs where you can. It should go without saying that anything that isn’t necessary to keeping the business running needs to go immediately. But you’d be surprised. The more successful the business, the cushier the office and the perks can get. And over time, those niceties can almost feel essential. But the office “Candy Corner” and “Donut Mondays” simply must go. You also might be able to reduce necessary costs. Switching from paper-based accounting and other system to digital ones can often help reduce hours. You might also consider negotiating with your vendors to see if they can reduce costs in any way – if they can find a way to cut back a little without losing a customer outright, they probably will.
  • Don’t stretch – survive. Similarly, but from 10,000 feet, you need to look at your budget in terms of “what do we need to survive?” If you’ve slated money toward expanding your business, upgrading your facilities or anything else focused on growth, those plans should be put on hold.
  • Keep a close eye on cash flow. In an ideal world, every small business would always be disciplined about monitoring cash flow, but it’s downright necessary if you’re going to manage a financial crisis. Among other things, this means being strict about customer invoices being paid (consider sending payment reminders ahead of invoice due dates) and knowing down to the day when any of your bills must be paid.


Sadly, some businesses do fail. They’re simply so indebted that they need assistance to get out. Enter bankruptcy, in which the debtor typically gives up some if not all business assets in exchange for wiping part or all of the debt.

A few types of bankruptcy to consider include:

  • Chapter 7: Chapter 7 bankruptcy typically is for companies that do not have a reasonable chance of continuing, usually because the debts are too overwhelming. In Chapter 7, the business immediately ceases operating. Then a court-appointed trustee takes control of assets and liquidates them to pay back creditors.
  • Chapter 11: Chapter 11 bankruptcy can be used if a business turnaround is possible. The business will be given a chance to reorganize and operate under a court-appointed trustee. Creditors must approve of the reorganization plan, which usually will include some sort of long-term repayment plan.
  • Chapter 13: Chapter 13 bankruptcies are used in personal bankruptcy, but also are applicable to businesses that are structured as a sole proprietorship. Because a sole proprietor is responsible for both personal and business debt, his or her assets can be used to pay off the debt as part of a reorganization. In some cases, you’ll get to keep some property, and some loan balances may be reduced.

Ask for Help Before It’s Too Late

The best way to stave away bankruptcy is to be proactive. Don’t wait until you’re embroiled in a financial crisis. Look for help at the first sign of trouble. For instance, McManamon & Co.’s accounting services can help small and midsized businesses get a better handle on their finances and suss out potential cost savings and other efficiencies.

And if you’re in a worst-case scenario, you don’t want to deal with bankruptcy alone. Our bankruptcy experts work with your business and legal representation, as well as debtors-in-possession, secured and unsecured creditors’ committees, equity stakeholders, receivers, bankruptcy trustees, examiners, liquidating trustees and disbursing agents to resolve financial problems efficiently and with as little stress as possible.

If your small business’s financial situation is difficult, reach out to us at 440.892.8900 or contact us online today.

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