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Money Matters: Bankrupt or not?

How to know if a business is already bankrupt
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Q: At what point, exactly, is the business called "bankrupt"?

A: A business is bankrupt when it is not able to pay its creditors and suppliers anymore due to insufficient cash flows. The cash flow problem may be either caused by poor management or declining sales growth.

A business can be profitable in paper but may be technically bankrupt because of cash flow issues. For example, you can reach your sales quota every month and show net profit in your income statement, but if your sales are financed largely by receivables and you don't have enough working capital to support it, a significant delay in payment or non payment by your customer may immediately make you financially illiquid.

At this point, you may be considered technically "bankrupt" because you will be at risk of missing your payments to your creditors and suppliers.

Henry Ong, CMC, CMA, is president and COO of Business Sense (www.businesssense.com.ph ), a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at hong@businesssense.com.ph or post your Money Matters question here .

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