Top 8 Reasons So Many Small Businesses Face Bankruptcy

If you are thinking about starting your own small business, you may have heard some rather frightening statistics about how these companies often go bankrupt. Many small businesses have to file for bankruptcy within the first five years, and so people are often skeptical about starting one. They do not want to have all of that debt, and they do not want to negatively impact their credit rating.

However, you should take a look at the most common reasons why this happens. You will find that many of the mistakes that business owners make can easily be avoided, allowing yours to thrive.

1. Overspending

If you are spending more money than you are making, chances of getting into bankruptcy become high. This is fairly common especially due to the fact that you have to spend money to make money. It is important to be very careful when handling expenses to avoid lax accounting procedures. Take time to find out exactly how much is coming in and how much is being spent. If you are spending more than is being made, the problem needs to be addressed as soon as possible before it is too late. This can be solved by developing an accounting system that will track your expenses in a well-timed manner.

business bankruptcy

2. Expanding Too Quickly

It is only natural that you want to see your business succeed and expand especially if sales are growing well. Avoid the temptation to move on to the next level fast without making the proper calculations as this can land you into bankruptcy problems. Before this is done, make sure you carry out thorough market research to ensure that the market is able to support the expansion plans without a problem. This is because you don’t want to find yourself in a situation where there are no sales after you have gone through the expansion process. Be careful not to overextend as it might cause more harm than good.

3. Positive Cash Flow

Believe it or not, there are some businesses that have gone through bankruptcy as result of having too many sales. The problem here is that in most cases payment is only made after the product had been delivered which can take many months. Regardless of how many orders you have, you might find that you don’t have money to run the business. To avoid getting into such a tough situation, make sure that there is enough money coming in as well as going out to be on the safe side.

4. Lack of Customers

On the outside, a lack of customers seems almost too simple. However, you can analyze a location before you start your company to figure out if there are going to be customers to support it. Do not just start the business that you want without taking into account the realities of the situation. A shop selling snowboards is not going to last very long by a beach, and a shop selling surfboards is not going to last long in the mountains. Be sure that you open a business that has a reasonable chance of finding enough customers to stay open.

5. No Solid Business Plan

You also need to have a solid business plan before you start. Decide how you are going to find new customers. Decide how you want to brand the company and what you want to do to advertise. Set goals for yourself for revenue growth. If you do not know what you are trying to accomplish, how will you ever work to head in that direction? Many business owners do not think up any sort of plan or marketing strategy, and it is too late by the time they realize that they needed one.

6. No Backup Plan

Furthermore, many businesses do not have any way to make money outside of their main products. There is no backup plan if the main plan fails. When it does, the business folds. You should always have at least two plans. For example, many people want to open breweries. It would be wise to start out as merely a bar, selling beers that other companies have brewed. You can then launch your own line of beers after you are consistently making money. Even if people do not start choosing your beers over the others, your company will not go out of business. You can also sell food and many other items.

7. Very Specific Products

It can be problematic if you sell only specific products that have a small niche market. Getting into a niche can be rather profitable, but even that could be too small. For example, perhaps all you want to sell is pool equipment for outdoor pools. In the summer, there could be a large market, but what will you do in the winter? Another example could involve starting a restaurant that serves only vegan food. If just a small percentage of the population is vegan, are you going to get enough regular customers without also offering non-vegan options?

8. Investment Mistakes

Finally, quite a few small business owners will invest their money in ways that they should not. They will spend frivolously. Do not waste thousands of dollars on decorations for your restaurant if you do not have enough money to buy all of the needed kitchen equipment. Do not expand your floor space if your restaurant is barely full as it is. You always need to make sure that your investments are going to pay for themselves.

Victor likes to give his readers insight into the best business practices through analysis of current business trends and examples of good management. He currently focuses on business bankruptcy regulations and procedures.

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