A new business can be expensive to set up. Depending on the kind of business you choose, you may require more or less finding. An online store that uses dropshipping has far fewer expenses than a pharmaceutical business. This is as there are setting up costs involved, purchasing machinery, hiring employees, paying taxes, and more.
New businesses are launched every day, but most of them don’t make it past the ten-year mark. Most companies tend to close within the first few years of starting operations. A major reason behind why this happens is businesses go broke and can’t afford to stay in operation anymore.
Why Are New Businesses Are At Risk of Going Broke?
Going broke as a business owner essentially refers to not being able to afford the daily maintenance or operations of the business. Should a business go broke, then there could be legal and financial liabilities as well. If you run your small business as a small proprietor, then you and your business are the same entity.
If your business goes broke, then so do you. You also carry all legal and financial obligations for the business as well. So any payment that the business owes or has to make, will have to be made by you. This will change depending on the legal structure you choose for your business. But for sole proprietors, going broke can have a direct impact on their lifestyle and finances.
New business owners, especially those who haven’t yet gathered experience yet, can make rushed or impulsive decisions. A more common reason, however, is bad financial management. This happens typically when a business owner doesn’t regularly monitor business finances. Should expenditure continue to be greater than income over a long period of time, this could result in the business losing money.
But is there any way to avoid going broke when starting a new business? Here is everything you should know:
1. Think About Your Legal Structure
To ensure that your business can safely tide through the first two to three years, choose your legal structure after careful consideration. This is due to the tax and financial liabilities you will owe as a business owner. You can choose between:
- Sole Proprietorship: It’s was to set up your business under this legal structure, making it popular among new business owners. However, sharing an identity with your business can also affect you. Should your business get sued, you will get sued directly. However, aside from this, new business owners find this business structure to be easy to work with.
- Partnership: Two or more people are in charge of the business. Responsibilities and liabilities are distributed between the partners.
- Limited Liability Company: Shareholders and stakeholders bear limited liability over their contributions to the business.
- Corporation: Business is a separate legal entity from owners.
The legal structure that you choose will depend on the kind of business you’re running as well.
2. Startup Costs and Funding
Aside from registering your business, you will also need to think about setting it up. If you start a business with low cost of entry, then it can prove beneficial for you. Certain kinds of businesses, such as those dealing with specialized machinery, heavy industry, and even commercial cleaning, ca be expensive to run.
If you’re a new business owner with limited funding available, then the cost of entry becomes important. You don’t want to run out of cash within your first few years. Businesses like consulting, running an online store, and even tax preparation and planning, have lower startup costs.
3. Detail Potential Profits
Setting your financial targets ahead of time can help you create plans to meet those goals. Conducting at least an annual report on potential profits for the year can show you how much success your business can get. And if you fail to meet those targets, then you can try to isolate what went wrong and restart the procedure.
You can also take this a step further and consider monthly profits as well.
4. Create A Cash Flow Management Strategy
Your cash flow is the amount of money coming into and leaving your business. That is your income and expenditure. For a new business owner, learning how to monitor cash flow is important. It shows you how much money you are making, how you’re spending it, and what your profits are.
Your cash flow management strategy should be designed keeping in mind how much you need to make to break even. Cutting away all extra expenses will also help you to stay within your business budget.
Businesses that make it past the first few years are more likely to become enduring successes. Start using these tips early on as you start your business. That way, you will have a financial strategy that can help you avoid going broke right from the beginning.
Another way to avoid going broke is with business insurance. The right combination of insurance policies can enable business owners to protect themselves and their businesses from potential risks. If you want to learn more about business insurance, then click here.
- Curtis, GC, Updated July 22nd 2019, ‘5 Ways To Keep Your Business Going in Hard Times’, viewed May 11th 2021, https://www.investopedia.com/articles/pf/09/keep-small-business-afloat.asp
- Staff, April 20th 2020, ‘How to Avoid Bankruptcy in Business’, viewed May 11th 2021, https://www.panorama-consulting.com/how-to-avoid-bankruptcy-in-business/
- Staff, ‘4 Simple Ways Your Small Business Can Save Money’, viewed May 11th 2021, https://businesstown.com/4-simple-ways-small-business-can-save-money/
- Staff, January 28th 2018, ‘7 Ways To Save Money As A Small Business Owner’, viewed May 11th 2021, https://thrivehive.com/7-ways-to-save-money-as-a-small-business-owner/