How to Avoid Bankruptcy in the First Year of Your Business

About 4% to 25% of businesses fail in the first year of business which is an alarming rate. Sustaining operation for a single year does not seem like a long time, so how can one make sure that the business they are planning to launch survives for a least a year and that they give their business the greatest chance to succeed?

To increase your chances of success, you need the following things.

  • Abundant cash available to carry you through tough times getting your business started.
  • Keep your capital investments to a minimum until you are profitable because it will dramatically increase your chances of being successful.
  • Have a marketing strategy and marketing plan is critical because with a strategy and plan that has been written own, you will successfully attract clients if you do not have a strategy or plan.

What Leads to Bankruptcy?

The following are examples of the biggest mistakes that can lead to bankruptcy:

  1. Over-Extension. Growth requires investment but many companies find themselves taking on too much debt.
  2. Lack of Bookkeeping. When businesses do not handle their books well, they often run into difficulty. A business with sloppy bookkeeping is typically surprised that its performance isn’t what it expected—revenue is lower and expenses are higher than it thought. By the time the problem is diagnosed, it is often too late to fix it.
  3. Over-Optimism. When things seem good, businesses invest in new projects and new people. Their expenses increase in anticipation of new revenue but if work they expect gets delayed or cancelled.

How to Avoid Bankruptcy

Avoiding bankruptcy requires discipline and good fundamental business practices. Here are some things businesses can do to avoid bankruptcy.

  1. Be conservative. Be optimistic but not too much. Do not assume that every customer is going to pay or that every customer is going to stay. Budget for a reasonable case scenario, not the best case scenario.
  2. Have a business plan. As business grow it is important that you have one written. This plan should describe strategies and tactics related to things like sales, operating budgets, capital expenses, cash flow, input costs, and a means to track performance.
  3. Prioritize debt repayment. The best way to avoid over-extending is not to borrow in the first place. The next best way is to ensure that you are prioritizing debt repayment. If you can, avoid unsecured debt (such as credit card debt) altogether. In any loan or financing arrangement, negotiate for the best terms possible, and make sure to get it in writing. Among others, these include payroll taxes, utility bills, phone bills, secured loans, business rent, and more.
  4. Eliminate unnecessary expenses. Take a look at your bank and credit card statements and see if there is anything you can cut from your expenses. Some examples may include, employee gym membership, employee lunches, modern office improvements, unnecessary travel expenses, and more.
  5. Stay in touch with lenders. Be responsive to their requests for information. Failing to respond to your lenders when they inquire as to why you were late or missed a payment, will raise questions.
  6. Review insurance policies. Insurance is a big expense for most businesses. From health to disability to property and casualty, premiums tend to go up every year and suck cash flow away. Talk to your insurance agent and consider what options are available.
  7. Take advantage of tax reform. This year’s tax reform offers businesses the opportunity to use extra cash from tax savings to pay down debt and make strategic investments.
  8. Think outside the box. Reevaluate your company’s core differentiators. There might be ways you can sell your services and expertise as tangible products.

The Bottom Line

There are many reasons why a company will fail during their first year including from lack of market interest or poor execution, the most common reasons are financial struggles. If you follow the steps above in your business, you will be well on your way to success.