Common Mistakes That Lead to Bankruptcy (and How to Avoid Them)

Common Mistakes That Lead to Bankruptcy (and How to Avoid Them)
May 16, 2018 Toohey Reid

Bankruptcy: nobody wants to talk about it. It’s a taboo word for any business starting out. However, the stats show that approximately 50% of Australian businesses find themselves sliding into its clutches within the first four years of opening. It’s a very real problem, and avoiding it should be at the forefront of all business owners’ minds from the very beginning of their venture. But just willing it away won’t do, Australian businesses must be aware of the mistakes that commonly lead to bankruptcy, and the systems that they can put in place to keep themselves from falling into its trap.

Mistake #1: Lack of knowledge.

Many businesses end up bankrupt and broke because of sheer lack of knowledge. As a business owner, you are busy investing all of your time and effort into growing your business. So much so, that you may fail to research and comply with laws, or you may be losing money in places that have been overlooked for too long, such as your overheads.

Solution: Seek advice.

Every business needs a strategic operating structure and solid management system. It can be challenging to find the time to review and create these yourself when you’re so busy just running your business! This is why investing in professional advice is worth every penny. A business consultant will assist you in achieving a smooth-running business structure that will support your business long term. They will also look out for the aspects of your business that may be falling through the cracks while you’re occupied.

Mistake #2: Under-insured.

Many businesses don’t realise that they’re underinsured until the worst happens. It could be a break-in, a natural disaster or a data breach that does the damage. You may have settled for the cheapest insurance, or you may have failed to update your insurance policy as your company has grown. Either way, you’re underinsured and unable to cover the cost of the damage.

Solution: Don’t settle for a stock-standard insurance policy.

Going through an insurance broker to find the right insurance policy for your business is a smart idea. A broker won’t settle for a one-size-fits-all policy, and they’ll strike a hard bargain when it comes to the price, too. They’ll also know what to look out for, and will probably be able to identify potential risks to your business that you hadn’t even considered getting cover for. If you take your time and choose the right broker, they will be able to take care of updating your policy for you when your business expands, too. Just another aspect that you won’t have to worry about while you’re getting on with day to day management tasks!

Mistake #3: Under-prepared.

Denial can be an exceedingly present, and dangerous, trait in business owners. Denial leads to a refusal to acknowledge when things are falling apart, and a general disregard for the need to plan for the worst. It may be due to pride, or an unwillingness to ‘jinx’ a business venture by seeming to expect a negative outcome. But being prepared for the worst case scenario is critical.

Solution: Be realistic and have an exit strategy.

Remember, it isn’t about expecting the worst; it’s about preparing for it just in case. If you ever come to a point where you have to pack up shop, you need to know that you can do so gracefully, and without going into a massive amount of debt. You don’t want to lose all of your personal assets in the process. This is why having an exit strategy for your business is essential from the get-go. It’s proactive and sensible and will save you a lot of grief (and money) if the occasion should ever arise.

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Mistake #4: Letting it get personal.

Family business ventures can be a beautiful thing, but it can also be extremely dangerous. Leaving personal issues behind when you get to the workplace can be difficult. And things can get ugly, quickly. Whole businesses have fallen apart due to personal disputes filtering into the company environment.

Solution: Have an impartial business adviser.

If you run a business with close family and friends, it’s always a good idea to have at least one person that you can go to for an unbiased opinion. Someone who can take a step back and look at the situation objectively, removing any emotion and seeing only the facts. This may be a business adviser, a lawyer (should the situation escalate to a level that you require one) or your accountant (if the dispute is over money and how it should be spent). This person will be able to provide advice regarding the best options for the business, without becoming entangled in personal issues that can often sway decisions.

Mistake #5: No emergency funds.

If the economy takes a downturn, or your business sees an abnormally long period of inactivity, do you have enough money to see it safely through? A surprising number of businesses take each day as it comes and deal with problems only as they arise. This is a very risky way of operating a company. Dry periods are common, and you need to know that your business can survive them.

Solution: Establish and maintain a safety net of cash.

You should be contributing to a safety net of cash from the moment that your business begins making a profit. This safety net should be able to pay for your business to stay afloat, should you experience an extended period where you are not making sales. Drawing from your safety net will allow you to pay your rent, utilities and staff wages even when cash isn’t flowing through the business. Having a safety net has saved many Australian businesses from bankruptcy on more than one occasion!

Do you need an impartial business adviser and accountant all rolled into one? Contact Toohey Reid to discuss how to build a strategy to protect your business from bankruptcy.

General Advice Disclaimer

General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

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