Starting your own business is not for the faint of heart. A certain level of stress comes with carrying the responsibility of ensuring your business’s success. If things go wrong, it will all fall back on you. That said, the sense of accomplishment and freedom of running your own business make all the challenges worth it.
With great planning and clear business practices, you can avoid the drawbacks and drive your business to financial success. Learn why small businesses end up in bankruptcy and how you can prevent it from happening to you.
Poor cash flow
The main reason why businesses fail is because they are not bringing in enough money. You need to have more money coming in than going out, or you’re on the express train to bankruptcy. This might mean increasing your prices, decreasing costs, or combining the two. There might also be various service models you can offer (such as subscription services) or ways to branch out your income.
Come together with a bookkeeper or accountant to help you identify any issues with your cash flow straight away, or to prevent one before it happens. The earlier you detect a cash flow problem, the better.
Insufficient initial funding
Don’t rely entirely on credit for your business funding. If you start in a deficit, climbing out of debt and becoming cash positive will be much more complicated. It can be challenging to break the habit of using capital investments on credit in a bid to start making money.
Research all of your options for initial funding. Ensure you have more than enough funding to start your business off well.
Difficult market conditions
Economic recessions or depressions can negatively affect businesses, especially those relying heavily on consumer spending. Unfortunately, when it comes to a poor economic climate, there’s not much anyone can do but try to budget for the market’s fluctuations so you have breathing room for when times get tough.
Having an emergency account with money ready for any unexpected situations will at least give you some cash to get through if things take a downturn.
Poor financial management
Finances can get complicated, so you must ensure you’re on top of things. If you can’t keep accurate financial records, manage expenses effectively, and correctly forecast future revenues and costs, you could suffer financially.
Work with an advisor, accountant or bookkeeper if you’re having trouble managing your finances. They can help you create a plan and show you how to best use your money.
Lack of market research
If you can’t compete with your rivals, you may struggle to generate enough revenue to stay in business. This problem typically relates back to a lack of market research.
An entrepreneur jumps into the market they’re passionate about, only to find out that somebody else is already offering the exact same thing, and they’ve already got control of the market. Or maybe the particular product or service isn’t needed at all.
Do your market research before entering business and offering a new product or service. The results will tell you whether the market needs what you’re offering.
Legal issues
Fines, penalties and lawsuits can be costly for businesses, taking a hit on financial resources. The best way to avoid this is to make sure you’re familiar with the rules and regulations you must follow or get help from a professional advisor when required.
How to avoid bankruptcy
While the reasons businesses end up going bankrupt may seem numerous, there are some specific things you can do to make sure it doesn’t happen to you, such as:
- Regularly review your business’s performance and ensure you’re maintaining accurate financial records.
- Create a solid business plan that includes expense projections and realistic revenue.
- Diversify your business’s revenue streams to reduce reliance on a single source of income.
- Be aware of market changes and industry trends.
- Manage costs effectively and reduce unnecessary expenses.
- Seek professional advice from accountants, business consultants and lawyers when necessary.
- Build up an emergency fund to help your business tough it out through difficult times.
- Manage what you already have effectively and avoid taking on too much debt.
By implementing these steps, you can reduce the risk of bankruptcy and increase the chances of achieving long-term success.
Final thoughts
A business can end up in bankruptcy for many reasons, but planning can go a long way. Take the time to research, be honest when you need help, and work with financial professionals to help you stay profitable.
If you have any questions, feel free to Join the conversation…