Handling Financial Difficulties

The financial difficulties problem is governed by a number of different legal regulations from different areas. These include regulations in the area of corporate law, accounting regulations and insolvency proceedings. The current entrepreneurial environment is very unstable, with unpredictable conditions the entrepreneurs need to adjust to.

Legal requirements

Prevention, an early warning system and respect of entrepreneurial risks are very important. The goal of prevention is to prevent problems. In order for an entrepreneur to take preventative measures, he/she needs to have enough information about a potential problem. It is important to have information on past development, current processes, the assumed future development and key moments. The source of various findings may be information on turnover, stock levels, development of receivables and liabilities, and others.

A risk means the possibility that what we expect will not happen, or, the opposite of certainty. There might be a number of risk situations and crises in a company; one of them is a failed business plan. The reason might be the wrong business activity, overvaluation of goals, etc. Other frequent problems include undercapitalised business when the entrepreneur or the company do not have enough equity, success, fraud, embezzlement, bribery and management failure.

It is important to respect legislative requirements, for instance those related to occupational safety or production quality. Another important point is meeting the tax duties to avoid large penalties. Respecting contractual obligations is equally important.

Risk policy is used to prevent negative effect of risks. It is based on the identification of causes of risks, measuring their degree and protection against them. Protection against risks means:

  1. Defining the risk boundaries – outmost points – the best and worst situations
  2. Division of risk
  3. Diversification of risk - have more suppliers, for instance
  4. Transfer of risk to other entities – responsibility insurance, property insurance, etc.
  5. Creation of reserves

The most frequent reasons for corporate problems are bad management and lack of financial success. In order to avoid such situation, an entrepreneur should observe several principles:

  1. Before starting, it is important to have a study prepared on the size of profit the business plan would bring and compare that to interest rates for financial resources allocated to the business if they were deposited in a bank. If the interest rates are higher than the profit, the business is not worth it.
  2. It is good to find out, or at least consider, whether the provided product or service will be successful with customers and if they will be interested in it.
  3. When identifying economic results the entrepreneur needs to look at not only the overall values, but also the results in the individual areas.
  4. When implementing the plan it is good to compare the planned results to reality, identify reasons for deviations and attempt minimisation of negative deviations.
  5. It is good to continually monitor the financial health of the company through financial analysis. A financial analysis compares values in the individual years and compares them to similar companies in the area. The analysis uses several indicators – indicators of profitability (rentability), liquidity (or the ability to repay liabilities), activity (turnover), and indebtedness.

Resources

An analysis of the company''s financial situation, with specific procedures and methods, is able to provide an overview of the comprehensive financial and economic situation of the company.

The following governmental and non-governmental institutions and web portals offer further information and useful services in case of financial difficulties of a company.

Personalised help and advice

If you are interested in getting advice from an independent entity in a situation when you are considering debt (i.e. you are considering getting credit, a loan, etc.). In such cases, our Advisory Center offers its services. It also offers its services if you might not be able to pay instalments on your credit or loan due to an unexpected change of your situation, or if you already are in such situation.

The Enterprise Europe Network is an extensive network (with 600 host organisations and 4 000 full-time staff) providing information and advice to entrepreneurs through its local partners.

Legal texts

Document created in co-operation between Your Europe - Business (EU portal for companies) and BusinessInfo.cz.