As a result of the COVID-19 epidemic, the business sector, particularly SME’s, is currently undergoing turbulence. To combat this epidemic, SMEs doers must increase their efficiency and effectiveness and maximize their market share by leveraging possibilities and innovative solutions. Prior to and during a pandemic, small and medium-sized enterprises (SMEs) faced challenges that may have led to their bankruptcy rather than having a large influence on the national economy and the micro welfare. having The purpose of this study was to determine the effect of the innovation strategy carried out by SMEs in dealing with potential bankruptcy in the Covid-19 pandemic era. Innovation strategy is measured through “Cost Research and Development”, while bankruptcy prediction is calculated using “Z Score Altman Model”. The research used primary data, namely financial data questionnaires, while the sample and research population were SMEs in the province of Central Java. The results show that the innovation strategy is proven to be able to influence SMEs bankruptcy prediction, and its financial performance is proven to be a significant moderating variable which, if it shows good results, then it can weaken the bankruptcy prediction. Furthermore, this innovation strategy is also able to reduce the prediction of bankruptcy because it has a positive effect; the higher the innovation strategy, the higher the Z-Score value is, while the potential for bankruptcy prediction becomes smaller.