Avoiding bankruptcy: Top reasons it happens and ways to prevent it

Avoiding bankruptcy: Top reasons it happens and ways to prevent it

wallet, empty, poverty

Starting a business is not for the faint of heart. A certain level of stress comes with carrying the responsibility of ensuring your company’s success. If things go wrong, it all falls back on you. That said, the freedom and sense of accomplishment of running your own business make the challenges well worth it.

With good planning and strong business practices, you can avoid the pitfalls and drive your business to financial success. Learn the top reasons why small businesses end up in bankruptcy and what you can do to prevent that from happening to you.

Poor cash flow

Not bringing enough money in is the main reason why businesses fail. You simply must have more money coming in than is going out, or you’re on the express train to bankruptcy. This might mean increasing your prices or decreasing your costs, or a combination of the two. There might also be different service models you can offer (such as subscription services) or ways to branch out your income.

Work with an accountant or bookkeeper to help you identify issues with your cash flow as soon as you know there’s a problem–or to prevent one before it happens. The earlier you catch a cash flow problem, the better.

Insufficient initial funding

Don’t rely solely on credit to fund your business. If you start in a deficit, climbing out of debt and becoming cash positive will be much harder. It can also be challenging to break the habit of throwing capital investments on credit in an attempt to start making money.

Explore all of your options for initial funding. Make sure you have more than enough funding to start your business off on the right foot.

Difficult market conditions

Economic recessions or depressions can negatively affect businesses, especially those relying heavily on consumer spending. Unfortunately, there’s not much anyone can do about a poor economic climate but try to budget for the ebbs and flows of the market so you have breathing room if times get tough.

An emergency account with money set aside for unexpected situations will at least give you some cash to survive on if things take a downturn.

Poor financial management

Finances can get complicated, which is why you need to make sure you’re on top of things. Failing to keep accurate financial records, not managing expenses effectively, and not correctly forecasting future revenues and costs are all issues that could hurt you financially.

Work with an accountant, bookkeeper or advisor if you’re having difficulty managing your finances. They can help you set a plan and show you how to ensure your money is best used.

Lack of market research

If you can’t compete with your rivals, your business may struggle to generate enough revenue to stay afloat. This problem typically comes back to a lack of market research.

An entrepreneur jumps into a market they’re passionate about, only to discover that somebody else is already offering the same thing – and they’ve already got the market cornered. Or maybe there’s no need for that particular product or service at all.

Do your market research before going into business, and before offering a new product or service. The results will tell you whether there’s a need for what you’re offering.

Legal issues

Lawsuits, fines, and penalties can be costly for businesses, draining their financial resources. The best way to avoid this is to ensure you’re familiar with the rules and regulations you must follow or get help from a professional advisor when necessary. An ounce of prevention is worth a pound of cure.

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:

  • Maintain accurate financial records and regularly review your business’s performance.
  • Develop a solid business plan that includes realistic revenue and expense projections.
  • Diversify your business’s revenue streams to reduce reliance on a single source of income.
  • Stay current on industry trends and market changes.
  • Reduce unnecessary expenses and manage costs effectively.
  • Seek professional advice from accountants, lawyers, and business consultants when necessary.
  • Build up an emergency fund to help your business weather tough times.
  • Avoid taking on too much debt and manage what you already have effectively.

By taking these steps, you can reduce the risk of bankruptcy and increase the chances of long-term success.

Final thoughts

A business might end up in bankruptcy for many reasons, but a bit of planning goes a long way. Do your research, be honest when you need help, and work with a financial professional to help you stay profitable. [Contact us] to further discuss how you can protect your business and learn how we can help.

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