It is extremely easy to go bankrupt as a small business owner. The Small Business Association (SBA) reports that small businesses recorded an increase in the number of bankruptcies - from about 19,000 to over 43, 000 - in the space of just two years.
This is because unrestrained excitement for the baby company that you just have started, can lead to unchecked expenses and spending. In order to avoid falling into the above mentioned predicament, and save your business from bankruptcy, critical steps must be taken.
Below are a few of them.
1. Have A Budget – And Stick With It.
This seems quite obvious, but failing to adhere to a pre-planned budget has been found to be one of the common causes of small business failures.
As a small business owner, take the time to determine the amount needed for your business to operate monthly. (You should incorporate a little extra of about 20 percent to be on the safe side.) Then verify your present sales - averagely. Estimate your maximum cost level of stock, raw materials and operating costs – taxes included. From the figures, you can determine your business costs, as well as the amount you might need to reduce your costs to.
Sticking with a budget might include cutting costs to reach your goal. With a fine tooth comb, inspect every single item on your operating expenditure. Eradicate redundant charges. Travel less, video-conference more. Try products with cheaper options and charges. You will be surprised how much you can save – and help keep your business above water.
2. Be Conscious And Knowledgeable Of Your Cash Flow
This step is closely connected to the above point. A lot of small business owners do not know if the money in the bank increased or decreased at the end of the previous month. Most only track and concentrate on the daily, monthly and annual sales made - but are ignorant of their cash flow statements.
According to Bankruptcy Lawyer David M. Offen from GetFreeOfBills.com, “Cash flow negligence tends to be the core reason many businesses fail. When businesses hyper-focus on that little cash INS and cash OUTS, they’ll be able to float even in hard times.”
Always demand for your cash flow statement - and learn to read it. Ask your accountant to teach you if necessary. Make a monthly habit of reviewing your bank statement to compare the increase or decrease of the month’s cash flow with the previous month.
3. Avoid Getting Into Debt For The Wrong Reasons.
Too often, small-business owners get into debts in a bid to cover up continuing losses. A major contribution to these losses, apart from other factors, is when owners want to appear successful before they really are. So, they lease expensive offices and vehicles, buy pricey furniture, go on expensive business trips…ad infinitum.
This method of spending has crashed many, and put them out of business. It is impractical to invest excess on organizational infrastructure, before you have made the profit to maintain it.
If you have to borrow, it should for capital – to buy equipment, finance inventory or meet temporary cash flow needs. Only spend on what actually helps your product or service sell and expand. Move everything to the back burner, until you have enough profits to put back in. With the help of your banker or financial advisor, analyze your debt use every time you apply for extra money.This would provide more clarity and caution.
4. Save For Downtimes And Slumps
Depending on a number of factors, most businesses experience cycles, spikes and slumps. When there is a spike in sales, it is common practice for many small owners to use spikes– in addition to sales made - to make more investments in the business. However, when there is a slump - economic recession, a new competition, the loss of the company’s biggest client- they realize, too late, that they invested everything and kept nothing for savings.
To stay out of the reach of bankruptcy, always put away enough savings to balance losses, assuming sales drop way below level of present sales.
5. Avoid Putting All Your Eggs In One Entity’s Basket
Most small business owners pride themselves on being risk-takers. Once they believe an entity – individual, dealer or product/service – is the next best thing after sliced bread and can maximally upgrade their business to another level, they tend to stake their all on it.
While risk-taking with total abandon might sound ideal, it is actually less idealistic and more pragmatic to carefully venture into smaller risks which have been calculated – and thus make measurable progress. Take lesser investment risks, and then assess the outcomes to know the next course of action.“Build the minimum viable product and test to see if customers will actually buy it before proceeding further.” - Eric Ries, The Lean Startup.
In actual fact, most successful small businesses have had to ruthlessly liquidate some not-very-essential parts of the business to generate more cash. Others have learnt to squeeze out increased flow through stiffer management of the account books. It is highly recommended that, irrespective of a business’ product/services, additional cash flow is needed.