Being an entrepreneur is exciting, but the challenges faced by new businesses are numerous. Organising investment, product development, and growing your company are all essential for success, but most important of all is money management. On average, over 50% of UK start-ups fail within five years for the simple reason that they run out of money. Gen up on the five financial mistakes that can lead to business bankruptcy to avoid making these errors yourself.
Especially for smaller businesses that are just starting out, bad budgeting can lead to bankruptcy.
A budget should accurately track your outgoings and income, and forecast your revenue for the year. This means that you need to include all financial data in your budget for it to work correctly.
New companies often have thin budgets that only include their fixed costs rather than variable and one-off costs as well. Being too optimistic with profit predictions can also cause problems, leaving companies surprised to be in the red at the end of the financial year.
Neglecting cash flow
While monitoring annual profit and loss is a business basic, many smaller companies and start-ups are guilty of neglecting cash flow.
Gaps in investment, quarterly expenses, or unexpected payments can all lead to problems in cash flow. These can make a company insolvent almost immediately, even if annual profit predictions are healthy.
Not using specialist services
Especially when you’re starting out in business, you want to keep your expenses to a minimum. However, not using specialist services can harm you financially in the long-run.
Seeking support from business accounting and consulting experts helps with the more difficult aspects of money management such as tax law. They can also offer insight into factors that might affect your company’s finances in the future such as risk and restructuring.
Understanding potential risks and how to navigate them will help to safeguard your start-up against administration or liquidation.
No emergency fund
Just as you need savings for your personal finances, businesses should be backed by spare funds. Unexpected issues can arise at any time, leaving you reliant on savings to make essential payments from product development to staff salaries.
Companies with no emergency fund can be left stranded within weeks, or reliant on external help like business loans.
Limited customer base
Business bankruptcy is not always caused by poor financial management. Bad choices with marketing and advertising can lead to a limited customer base which is just as damaging to a company’s success.
Relying on a small number of customers for your profit leaves you vulnerable. This is especially true during turbulent economic situations like the current cost-of-living crisis where people spend less on non-essential goods.