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Early Warning Signs: How to Detect Business Bankruptcy

Central banks around the globe are tightening their monetary policies in response to rising inflation. This results in increasing interest rates and greater chances of businesses going bankrupt. Whether a business is big or small, it has to deal with the regular complexities of taking financial calls while managing the risks involved.

Bankruptcy is associated with liquidating assets as the business fails to meet its credit obligations. This might dampen the company’s reputation and compromise its relationship with all third parties. As a result, it becomes difficult for the company to secure funds in days to come. Being proactive from the very onset can help businesses prevent bankruptcies.

Today, we will take a look at the different signs that can help recognize business bankruptcy before it is too late:

Diminishing Cash Flow

If your cash flow has been consistently negative, this is a significant red flag for business owners. It denotes that your business needs more funds to cover all debt payments and other running expenses.

Rising Debt Count

Once your business falls into a debt trap, you will have to borrow further debt to repay the existing one, which will continue.

Revenue Going Down

Your business will only sustain itself if you can increase revenue growth. Constantly decreasing sales points out more significant problems. This might either be an internal issue, a customer-specific issue, or a need to be updated amidst the constant innovation. If any company wants to be in business for the long term, then it’s extremely crucial to address the causes and solutions to declining revenue.

Corrosion Of Profit Margin

Increased costs, pricing pressures, and inefficient operations can erode profit margins. While all businesses have had to deal with such issues, consistently negative margins can be the signs of looming danger.

Violations Of Loan Agreements

Before sanctioning a loan, all lending institutions sign an agreement with the borrower. These agreements help protect the lender’s interest by ensuring the borrower can repay the borrowed money. Some famous examples of loan agreements are fixed-charge coverage and DSCR. If your business consistently fails to honor these agreements, it’s time to analyze its financial standing.

Falling Working Capital

If the business’s working capital is decreasing, this indicates cash flow constraints, making it challenging to honor short-term obligations like employee salaries.


The management team and business owners need to review the financial statements regularly. This will help them monitor the leading performance indicators and understand the warning signs in advance. Though filing for bankruptcy should be your last resort, you can discuss your condition with a legal expert who can educate you regarding the nitty gritty of Chapter 7 Business Bankruptcy.

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