When you set up your small business, words such as ‘insolvent’, ‘bankrupt’ and ‘liquidation’ most likely never factor into your planning. However, it only takes one major monetary crisis to put your company at risk.
Fortunately, there are several steps you can take to prevent your business from being at risk. The most significant of these is to enlist the services of the commercial litigation lawyers Melbourne companies rely on to ensure all precautions are taken to avoid insolvency.
What Are Some of the Major Causes of Bankruptcy?
There are three common reasons why a start-up business may go bankrupt. The most significant of these are discussed below.
1. Poor Bookkeeping
Having brilliant ideas for selling products and services in your business is great. Unfortunately, some small businesses often neglect the record-keeping aspect of the company. Not keeping accurate records can lead to problems at tax time as well as losing track of expenses.
It’s not uncommon for businesses to overspend in the first two years. This usually happens when eager business owners want to expand a product range too soon. Employing too many employees during the start-up process can also lead to a huge financial drain.
3. Taking on Too Much Risk
Some business owners take on too much debt in the early days of the business. Without being aware of the company’s revenue ceilings, too much debt can lead to a massive monetary crisis.
Preventative Measures to Avoid a Financial Crisis
As you’re drawing up your business plan, it’s crucial to familiarise yourself with a few of the preventative measures to keep insolvency at bay. Our experts have highlighted a few practical pointers.
1. Approach Debt Repayments Correctly
When it comes to debt repayment, always prioritise loans that may be secured against business equipment first. Why? Because defaulting on this debt will result in the loss of equipment. Another approach would be to pay the biggest debt off first as this will accumulate the most interest if not paid on time.
2. Increase Short-Term Cash Flow
During the initial stages of your business, you might not have the time or experience to chase invoices. However, it’s necessary to make time and get a streamlined system in place. Recovering what you’re owed is critical to ensuring a stable cash flow to pay off your own debts.
3. Eliminate Unnecessary Expenses
When times are tough at home, the first thing you do is cut back on expenses that aren’t crucial to survival. The same must be done in your business. A few simple ways to reduce expenses are:
- Cancel unnecessary subscriptions to software, programs or apps – separate the necessary from the nice-to-haves
- Ensure that there are budgets in place for stationery, cleaning and staff refreshments. For instance, we all enjoy a cappuccino in the morning, but speciality coffees are expensive. Consider regular coffee for the office staff.
- If you have an office, put measures in place to reduce the utility bills. Even switching light bulbs can make a difference.
4. Revise Your Staffing Needs
Full-time employees can be beneficial to the company because they tend to be more invested in the company’s success. However, employee costs can be a considerable expense, especially during the growth stages.
Paying full-time wages can be a huge waste if employees are sitting around doing nothing as they wait for customers. Rather opt for employing a few core employees only.
Additional employees can be hired on a temporary basis, as needed. Ensure everyone has a job description to ensure the core staff can perform the necessary tasks and optimise their time for the company.
5. Have Regular Equipment Reviews
At the onset, you might invest in a lot of equipment such as printers, company cars or even computers. It’s essential to have regular reviews of which equipment and assets are being under-utilised. Our experts recommend selling these items to increase cash flow.
Another under-utilised option is recycling old computer equipment. Before you send old PCs or printers to the landfill, consider selling them. At the end of the day, all these small amounts of cash will help fund the bigger picture.
6. Consult With Your Commercial Lawyer
It’s important to have regular consultations with your commercial lawyer. Discuss the business progress, expenses and plans. Your lawyer will advise you on the right steps to keep your business on track.
You wouldn’t get divorced without opting for one of the divorce lawyers Melbourne residents turn to in times of marital issues. In much the same way, you shouldn’t neglect to add a legal voice to your small business.
Keeping your business from insolvency can mean it’s time for some tough financial choices, especially in the growth stages. Be sure to keep accurate records of all expenses and revenues. Do a mini audit of your assets every three months to see what can be streamlined.
If your company shows remarkable success from the get-go, use the opportunity to either place money into a business savings account or pay up some business loans as quickly as possible.
Using our practical tips will give you peace of mind that your business is financially sound. Good luck!