What Is a Bankruptcy Risk?

Bankruptcy risk refers to the risk that the assets of an economic entity are insufficient to repay its liabilities. The so-called bankruptcy, in the legal sense, refers to the legal system of obligating the debtor to liquidate all its assets under the supervision of the court when the debtor becomes insolvent. Bankruptcy risk is an important aspect of corporate risk and a comprehensive result of other risks.

Bankruptcy risk

Bankruptcy refers to an objective state in which the debtor fails to settle its due debts and causes the dissolution of the operating entity. Although bankruptcy is an effective method of asset reorganization to some extent, bankruptcy also brings many negative effects, such as increasing the burden on enterprise employees, creditors and even the state. Therefore, it is necessary for us to take measures to prevent the risk of bankruptcy of enterprises.

Moderate debt management

Moderate debt management to reduce the risk of bankruptcy

The debt of an enterprise should be maintained at a "degree". Only by controlling the debt within this "degree", can it make full use of liabilities to save taxes and reduce costs while effectively reducing financial risks and avoiding bankruptcy. The determination of the "degree" of this liability of the enterprise should take into account the following aspects.

1. Properly structured. An important sign of a company's appropriate debt structure is that the debt repayment period coincides with the timing of the company's cash inflows. The amount of debt repayment is adapted to the amount of cash inflow. Therefore, enterprises should properly and reasonably match long-term and short-term liabilities according to the time and scale of their cash inflows.

2. Moderate quantity. Enterprises must control their total liabilities to within their own tolerance. This requires measuring the solvency of the company. The measurement of solvency requires comprehensive consideration of multiple factors such as the size of the company's assets, profitability, and cash inflows for a comprehensive judgment.

3 Moderate time. The time of the enterprise's debt should be as close as possible to the cycle of business activities and investment activities, and the enterprise should borrow funds at an appropriate time.

Strengthen management

Strengthening accounts receivable and inventory management

An enterprise must have sufficient cash flow when the debt is due to be able to guarantee the repayment of the loan without going bankrupt. Therefore, cash flow is very important for the enterprise. To achieve the optimal state of the company's cash flow, it should focus on the management of the corresponding collection of accounts and inventory.

The existence of accounts receivable will cause the company to incur management costs, opportunity costs and bad debt costs, and deferred collection is an effective means for enterprises to increase sales. Therefore, the existence of accounts receivable is beneficial to the company. Therefore, in the The management of the corresponding accounts receivable should not only focus on eliminating accounts receivable, but should weigh the sales profits and costs brought by accounts receivable. By determining reasonable credit standards and credit conditions, formulating a reasonable collection policy and doing a good job of defense against receivables risks, strengthen the management of corresponding collections to play its beneficial role and reduce its adverse effects.

The level of inventory management is also closely related to the financial status of the enterprise. Strengthening inventory management is also an important means to improve the liquidity of corporate assets. In order to obtain inventory, the ship must pay the agreed cost and purchase cost, and the storage inventory must pay the storage cost, and if the interruption of Ruizan, it will bring the cost of downtime, such as downtime, loss, loss, etc., so the focus of enterprise inventory management The point is to weigh various gains and losses to achieve optimal inventory levels. In this way, the liquidity of corporate assets is effectively improved and the risk of corporate bankruptcy is reduced.

Based on the enterprise's choice of investment direction

Accurately choose investment direction based on enterprises and markets

When choosing an investment direction, an enterprise must combine its own situation, define its own development direction and competitive advantage, and make investment decisions around its own development direction and competitive advantage. Accept projects that are beneficial to the future development of the enterprise and consolidate its own competitive advantage. In order to stand invincible in the competition, increase income and avoid bankruptcy.

Improve corporate credit level

Improve corporate credit and avoid bankruptcy at critical moments

China's "Bankruptcy Law" defines the final limit of corporate bankruptcy as "unable to pay off due debts", not "insolvency." This means that even if a company is insolvent, it can avoid bankruptcy as long as it can still repay debt by credit or other means. Therefore, enterprises should pay attention to improving their own credit level in order to save themselves in times of crisis. Enterprises can improve their credit standing in many ways, but they should pay special attention to the timely repayment of borrowings and do not leave bad records in the bank. In this way, it will be relatively easy for enterprises to borrow from banks when they are unable to repay their due debts. Enterprises should also pay attention to establish their own good credit image when using business credit, so that other companies are willing to give business credit to enterprises in times of crisis, and help them overcome difficulties.

Establish a corporate bankruptcy prevention system

Establish a corporate bankruptcy prevention system to prevent corporate bankruptcy

In addition to the above methods to prevent bankruptcy risks, companies can also establish a bankruptcy early warning system to assess the degree of bankruptcy risk in advance, and then issue a warning before the company enters a bankruptcy crisis, urging corporate managers to take early measures to effectively avoid bankruptcy. There are many models that companies can use to establish a bankruptcy early warning system. The more typical and commonly used are the univariate discriminant model, the Z-scol'e model, and the F-score model proposed by Chinese scholars.

In summary, although many factors may lead to corporate bankruptcy, as long as the company takes effective measures to prevent its existing problems, it may reduce the risk of bankruptcy and continue to survive.