There are plenty of reasons why a business needs to close its doors for good. Sometimes it is a lack of consumer interest, targeting the wrong market in the wrong geographical location, or it might even be a lack of adequate marketing. But the most common reason for causing a business insolvency is failing to protect your business against debt
Most of these mistakes are avoidable and are largely due to mismanagement on the front end of the business. Business owners who venture out into the murky waters of entrepreneurialism are simply unaware that beneath the tranquil looking surface, vast and unpredictable current waits to pull you under. Those who do not enter without a life-jacket, for instance, a good knowledge of their cash-flow or, at the very least a decent amount of equity saved, are more likely to drown.
This analogy might be a little morbid, but it is still accurate. Entrepreneurs are forever lured by the dream of building their own empire and ‘getting off the treadmill’ but they are woefully unaware of what it costs to start, maintain and scale a business from a financial point of view. Some of the factors that may lead to business insolvency – failing to protect your business against debt
Not enough cash reserves
It is a given that most entrepreneurs understand they require some capital to float the business. What many fail to see is that it might take 12-24 months to grow the business to something that is self-sustaining. While you are building your portfolio and solidifying your reputation in your industry, you will most likely be losing money because your expenses will outweigh your income. Start a business with enough cash behind you to allow for this.
Relying too heavily on credit
Credit cards are a great financial tool to manage cash flow if used properly. Pay them off before each payment cycle ends and thus avoid the interest fees associated with them. Small credit cards a typically not as significant a problem as ones with a large ceiling, but try to avoid the knee-jerk reaction to put everything on the credit card, it can very quickly get out of control.
Keep the business books and the personal stuff separate. Combining the two leaves the bookkeeping in a grey area that is difficult to reconcile and thus determine the actual position (fiscal health) of the business. Plus, it also leaves your personal financial status in some degree of uncertainty.
Pay yourself back
In the early stages of the business, it may seem like a good idea to re-invest profits back into the business from your own back pockets. Try to avoid doing this as it can really hurt your personal financial standings. It is also advisable to learn from others when it comes to business insolvency. There is nothing you will be faced with that someone in your network would not have encountered before. So, reach out to them and ask. If you don’t have a network, go build one. A business cannot survive without cash flow, but it definitely cannot survive without a client-base. Your network is your connection to that.