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4 Mistakes That Can Lead To Business Bankruptcy

4 Mistakes That Can Lead To Business Bankruptcy

by Altaf

Most small businesses face financial struggles during their first years. In fact, a slow road to profit is expected to the extent that the IRS doesn’t even expect businesses to be profitable before their fifth year. 

Still, just because profits aren’t expected immediately doesn’t mean you can play it fast and loose with your finances because, if you’re not careful with your business’s budget, you can find yourself on the brink of bankruptcy in no time flat.

Financial Struggles From The Start

Unless you’re already independently wealthy, there’s a good chance that your small business will face some financial challenges from the time you attempt to fund your business. Typically, small business owners have to apply for loans to cover startup costs, but how much money you’ll need to get started will also depend on your industry, location, and other factors. Many people also turn to family and friends for personal loans or ask them to invest in their new company. 

Whatever approach you take to funding your small business, it’s important that you don’t overextend yourself. Borrowing too much and trying to build your company too fast can make it more likely that you’ll end up filing for bankruptcy in the short-term when it turns out you don’t have enough business to cover that investment.

Who And How You Hire

Another mistake that can make your business financially vulnerable and lead to a bankruptcy filing is failing to hire strategically. What does that actually mean, though? There are several components. When bringing new people into your company, it’s important to consider their skills, your budget and practical needs, and how you’ll support each team member in their role. That includes having a clear process for onboarding and evaluation, among other factors.

Too Big Too Fast

As noted above, growing your business by too much too quickly – aka overexpansion – is a common financial mistake, and it can lead to serious financial issues. Additionally, it’s important to recognize that overexpansion can take a number of forms. It can mean offering too many services or products, hiring too many staff, or trying to open new offices, or some combination thereof. Any way you slice it, though, overexpansion can leave your business vulnerable to financial issues.

Compared to other problems, overexpansion may be the most remediable via Chapter 11 bankruptcy. As bankruptcy lawyer Rowdy Williams explains, “Chapter 11 bankruptcy can be advantageous for small businesses because it allows you to reach an arrangement with your creditors to pay back some of your debts after growing too big too fast, and to reorganize your business to become profitable. This can help you scale back again and rethink the best path forward for your business.” Many businesses, both big and small, file for Chapter 11 bankruptcy, and it can act as something of a second chance, both financially and in a larger sense.

Poor Recordkeeping

As a business owner, your records are a vital resource and will help you make informed decisions for your organization. If you don’t have good administrative practices, however, that information can quickly get lost, which is why poor accounting recordkeeping is a leading cause of small business bankruptcy. In fact, if you’re trying to decide where to invest your money, one of the best things you can do for your business’s long-term prospects is to hire or contract with an experienced business accountant. 

There’s no foolproof way to avoid bankruptcy as a business. Markets change, demand never emerges, and, simply put, anything can happen. Huge, established corporations file for bankruptcy every year, despite having enormous resources at their disposal, while many underdogs thrive. All you can do as a small business owner, then, is to be attentive to the prevailing wisdom and proceed with caution as you seek to build up your organization.

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