5 Things That Can Financially Ruin Startups

Financial stability is the most important aspect of every business. Without sufficient funds for business development and a regular cash influx, companies can quickly go to bankruptcy and liquidation. That’s why the thorough financial calculation is the obligatory task that needs to precede every business incorporation.

Before starting a business, entrepreneurs should have a backup plan and an exit strategy that will help them save at least some of the invested funds in case things start going south. Business owners should also make a list of the most difficult financial challenges they might face and create a backup plan for each one of them. In this article, we’ll be making such a list, and we’ll review some of the financial difficulties that can ruin new companies and lead them to liquidation.

Lack of sufficient capital

The lack of development capital is the most common challenge almost all entrepreneurs face in the first years of doing business. Most business operations require large investments in order to become profitable. In addition to this, entrepreneurs need to secure a working capital for at least 6 months of future expenses. To collect this kind of money, they need to share their ideas with investors who are willing to back them up and support their plan. The first investor is usually called the angel investor. It’s a person or a fund that will support the business idea while seeking a management role or a company’s share in return. Later, entrepreneurs can also seek funds from venture capitalists. In order to find the promising investor, business owners need to improve their presentation skills and create a business plan that will present their idea in the best possible way.

Good sales and low profits

Even some of the biggest corporate entities face this problem at some point or other. Overspending and hidden costs often eat company’s bottom line and leave no money for reinvestments. If your expenses are out of control, you should create a proactive spending policy and review every purchase you make. Production businesses should try to buy raw materials at the most competitive prices and service businesses often need to cut their utility, rent and payroll costs. There are many free apps that can help you organize your company’s expenditures and detect the holes through which your profits are leaking.

Expensive lawsuits

Lawsuits are common in the business world. You might be sued by unsatisfied customers or fired employees. When it comes to lawsuits, you should always rely on professional opinion. That’s why every entrepreneur needs to have at least one respectable lawyer on its speed dial. Make sure that you contact the attorney that specializes in the law problem you’re facing. For example, if you’re sued for consumer fraud, which is one of the most common lawsuits in the retail niche, hire a respectable consumer fraud attorney. If you usually cooperate with an attorney who practices general law, ask them to recommend you a good specialized attorney.

Bad debt

When it comes to bad debt, prevention is always the best cure. Unfortunately, it’s very hard to recognize bad debtors. In the first phases of business development, entrepreneurs often make overly-ambitious deals. Giving lots of credit to your customers and business partners can haunt you for years. The best way to avoid bad debt is to ask for money in advance. If you fall into the bad debt trap, you need to have a backup plan. Debt collection can be tricky, but you need to stay calm and remain in contact with your debtor. Remind them about the debt with emails, polite calls, and letters, and stop delivering your services immediately. If this doesn’t do the trick, you can hire a debt collection agency or file a lawsuit.

Late payments

Late payments are similar to bad debt, and they can also kill your business in the long run. You can fight them by tightening up your company’s credit terms or communicating contract terms early on during the negotiation process. You can also incentivize early payments and enforce late payment penalties in order to avoid bad debtors. If this doesn’t do the trick and late payments continue to damage your cash flow, find a respectable local agency that provides invoice funding services. These agencies buy off unpaid invoices and provide you with immediate cash, without the knowledge of your customers and business partners.

All businesses report to sales. If you constantly need to provide your customers with coupons, give out discounts and organize sales just to stay afloat, there’s something wrong with your startup finances. All price wars create high casualties, which is why you should focus on making your offer more competitive and cutting your costs instead of adding more discounts and diminishing the value of your products. With clockwork finances, competitive products and a little bit of luck, you will solve all of your business growth problems.

She is a digital marketer and blogger from Sydney. Currently working as a marketing consultant and a guest lecturer at the Melbourne University. Writes for Bizzmark blog and many other business related magazines and blogs. A proud mother of two.