According to the Small Business Association, 30% of businesses go bankrupt within the first two years, 50% within the first five years, and 65% within the first ten years. Why is this?
Running a business is a complicated process with many gears and cogs that must work together to run smoothly. But at the end of the day, you have a product or service you are trying to sell and make money from. Most people who start businesses think they need this one thing, and their business will boom. However, many others need various elements to avoid bankruptcy. Here are some of those elements.
Insufficient Capital
One of the most common reasons businesses go bankrupt is their lack of money to sustain themselves. Businesses need capital to cover expenses such as inventory, payroll, marketing, and rent. Your business will quickly go under if you do not have enough money to cover these costs. It’s good to have at least $180,000 in the bank during the first year of your business.
Poor Cash Flow Management
Another reason businesses go bankrupt is because of poor cash flow management. For a business to be successful, it needs to have positive cash flow—meaning that more money is coming in than going out. If your business spends more money than it is making, it will quickly become insolvent.
Debt
Another common reason businesses go bankrupt is because they have taken on too much debt. When a company borrows money, it needs to be able to repay the loan plus interest. If a business cannot repay its debts, it will be forced into bankruptcy.
Unexpected Expenses
Businesses can also go bankrupt due to unexpected expenses such as natural disasters or economic recessions. These events can severely impact a business’s bottom line and cause them to go under.
Location
Another reason businesses fail is that they are located in a bad location. If your business is in an inconvenient or unsafe location, customers will be less likely to visit you, which can severely impact your bottom line.
Lack of Customer Demand
Businesses can also go bankrupt if there is a lack of customer demand for their product or service. If people are not interested in what you sell, your business will not be successful no matter how well you execute your other business operations.
Poor Planning
Finally, businesses can go bankrupt if they have not been adequately planned. A well-thought-out business plan is essential for any successful business venture. Without one, your business will likely not make it very far.
While there are many reasons why businesses go bankrupt, by avoiding these pitfalls, you can increase the chances of success for your business venture. Additionally, consider these tips if you want to avoid bankruptcy.
Savings
Having extra cash can help your business stay afloat if you encounter problems. Having savings can help cover expenses while you look for ways to increase revenue. Additionally, the interest from the savings account can be a good investment in the long run. That’s why you should open reliable business savings account for your business. This account can help your company manage its cash flow and avoid bankruptcy.
Outsourcing
If your business is struggling financially, consider outsourcing some of your operations to a third party. Outsourcing can help reduce costs while maintaining high-quality services or products. Some companies outsource all their operations to a third party to save money and eliminate unnecessary expenses.
Seek Professional Advice
It’s also a good idea to speak with a professional financial advisor or accountant if your business is having trouble. They can provide advice and strategies to help you save money and avoid bankruptcy. These professionals can be beneficial if you plan to take on debt or invest in your business.
Plan for the worst
Hope for the best, but plan for the worst. This means having a solid contingency plan in case your business hits hard times. This plan should include things like cutting costs, finding new revenue sources, and making your business more efficient. By planning, you’ll be better prepared to weather any storms that come your way.
Monitor Finances
This may seem obvious, but keeping a close eye on your business’s financial health is essential. This means regularly reviewing your income and expenses, tracking your cash flow, and keeping tabs on your debt levels. By doing this, you’ll be able to identify problems early on and take action to correct them before they become too big to handle.
Your business is more likely to be successful if you take the time to avoid common pitfalls like those discussed here. Additionally, following the tips above, you can avoid bankruptcy and keep your business running smoothly.