In my last column I highlighted the main risks that cause a newly created company to fail, which for a country like Colombia explains the bankruptcy of about 80% of SMEs before they reach 5 years of age.

However, once the company finds stability in its revenues (in its sales), stable growth in asset growth, strengthening in corporate culture and many other virtuous circles are observed, which begs the question: Why do solid and stable companies fail?

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The main reason why consolidated companies go bankrupt is the lack of money to pay immediate obligations. Lack of liquidity when it comes to paying payroll, purchasing inputs, paying for transportation or a key supplier are immediate triggers to stop revenues or value generation, causing the company to face bankruptcy in less than 90 days.

However, the lack of liquidity is the consequence of the materialization of a risk, among which I would like to highlight and warn of the following:

• Lack of customer diversification: While landing a major customer can be cause for celebration, relying excessively on one customer that accounts for more than 20% of sales can be dangerous. If this customer fails to pay or defaults on payments, the company may run out of enough revenue to cover its operating expenses. Diversifying sales is key to business sustainability.
• High risk-taking: Managers who like financial returns often prefer short-term returns over liquidity, so they place the company’s capital in assets that may appear safe and profitable, but unnecessarily increase the risk of short-term illiquidity. Investing in the purchase of dollars, cryptocurrencies, fiduciary assets or even CDs, without having liquidity in checking or savings accounts, is placing a sword of Damocles over the life of the company.
• Lack of knowledge for cash flow management: Payments and revenues of a company must be constantly measured and monitored. Revenues must come in before payments to keep cash flow in balance. This simple idea causes many headaches for those who ignore it.
• Lack of revolving credit quotas or emergency funds: Lacking an emergency fund or even credit cards to bail you out is a risk no manager can afford to have. Information on short-term financing alternatives is the control for this problem.
• Lack of funding or capitalization of the company: Understanding the financial health of the partners and making them part of the state of the company is key to solve short-term liquidity problems. If the company needs the help of the partners, the Manager must make sure he has their backing.
• Poor pricing of products and services: Who would sell a product or service cheaper than it costs to produce it? Answer: Almost all start-ups, but what starts out as a marketing and sales strategy can continue to be a bad practice that goes unnoticed and ends up causing serious liquidity problems.
• Having illiquid assets: Companies do not fail because they lack money or are poor. A company can have buildings, jewelry, paintings and machines, but if it cannot pay the month’s payroll, employees and know-how will leave and the company will fail in the short term. Knowing how quickly I can sell an asset to monetize it is key when planning the company’s investments.
• Bad reputation: If your name, your company’s name or even the name of one of your employees appears in the news or social networks, and generates a big impact on the name or reputation of the company, it can happen that several customers stop buying your product. Although these things are forgotten or may be temporary, the lack of income is a materialized risk that in the short term causes liquidity problems.

Note: This article was proofread by ChatGPT.

Why do companies go bankrupt?