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How to bankrupt-proof your business during an economic downturn (Part 1)

The World Health Organization (WHO), in December 2019, identified the outbreak of the Corona Virus in Wuhan, China. It declared the virus a “Public Health Emergency of International Concern” a month after, and a “pandemic” on 11 March 2020. The devastating impact of the virus, since then, has spread all over the world, distabilising economic systems, institutions & structures. I recently came across a rather disturbing Mckinsey publication – in the United States of America, for example, about 2 million firms that are closed may be closed permanently because of the economic impact of COVID-19 with many more millions Small & Medium Enterprises (SME’S) struggling to survive. The economic impact of the virus is huge; the World Economic Forum (WEF), predicts that over 40% of jobs lost may never come back. That, of course, adversely impacts global per capita income, which has made its largest drop since 1870. The world is experiencing a downturn.

Bankruptcy, in simple terms, is when the sales revenue from a going concern is unable to cover, what accountants call, current liabilities. Current liabilities include loan servicing, salaries, rent, fuel, etc. Although more commonly used when companies are unable to fulfill their day-to-day financial commitments, however, individuals can also go bankrupt. If you can’t pay your rent (or mortgage) or are unable to fulfill other financial commitments in the short term, then you are bankrupt.

The fact is that businesses & individuals can be bankrupt at any time, however, SME data shows that most bankruptcy happens during economic recessions (or during downturns or pandemics such as the COVID-19 impact). During the Great Recession between 2007 – 2009, for example, bankruptcy, which is cyclical, increased by 74%.

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Economic cycles are constant. Recession, since 1900, has occurred on average every 4 years, therefore, businesses that stay around long enough will experience recession – it’s just a matter of time. As revenue dips during downturns, bankruptcy is aggravated and accelerated. Recessions are exogenous, business survival, therefore, is a function of how resilient the business is during the economic downturn.

This introductory article kicks off a series of follow-up articles, deep-diving into principles Entrepreneurs and Decision Makers should apply when faced with imminent headwinds of a downturn. Resilience, of course, is built over time however things happen; this article, therefore, focuses on interventions we can make in our businesses (or personal lives) when hit with a crisis.

Before I close this piece, I would like to emphasize three (3) key outcomes that the principles I will be sharing in subsequent articles try to fulfill:

1. Conserve Cash

2. Conserve Cash

3. Conserve Cash.

Evidence shows that most small businesses that go bankrupt do so not because they are unprofitable but because their current assets (essentially cash at hand) are unable to match their current liabilities (obligations).

Your business should not be a statistic.

Look out for Part 2 on Thursday 08 October 2020.

About the Author:

Akin Monehin is a thought leader, writer, speaker and business strategist. He is privileged to have worked in leading organisations like British Airways, Virgin Atlantic & Nigeria LNG Ltd. He is a 2015 recipient, Choiseul Institut France’s Award of Top 100 African Business Leaders under 40 Years old and has worked in over 10 countries including French and Arabic speaking ones.

He can be reached on akin. monehin@chicagobooth.edu

Views expressed in this article are personal and do not represent the views of any institution.

Recessions are exogenous, business survival, therefore, is a function of how resilient the business is during the economic downturn

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