For most small businesses, the excitement and optimism of running a business dies when reality sets in.
Studies show that most small businesses fail in the third or fourth year due to lack of capital, massive debts, shrinking profits and cash flow among other reasons.
Some business owners result in liquidating the business while others file for bankruptcy. These five tips should help small businesses avoid bankruptcy:
#1 Renegotiate Debt Payments with Creditors
Debts take a toll on small businesses especially if they involve high-interest rates. However, these same debts help facilitate the operations of a business to a large extent.
A creditor supplying the majority of the company’s stock has priority over other creditors. Also secured creditors whose loans have high-interest rates should be paid before unsecured creditors.
Renegotiating the terms of the payment goes a long way in easing the burden for your business. You may ask the creditors to accept smaller payments and extend the repayment period.
Be frank about your current financial situation and the need to reduce the payments or the total settlement amount.
#2 Changing the Management
New management introduces fresh ideas that will help the company improve its procedures and increase profits. A fresh set of eyes will also identify problems the existing administration may not recognize.
While it is difficult to allow new people to manage your business, the lack of personal involvement will enable them to make the necessary changes.
#3 Separate Personal and Business Finances
Most small business entrepreneurs use personal finances to make up for areas where the business is falling short. It causes a blur to many business owners as they can’t tell if the firm is doing well or not.
The money generated by the business should be used to maintain and grow the company. The best way to differentiate separate your finances and those of the company is to include yourself on the payroll.
It also helps you to stop using the business money for personal use. If the company does not have enough cash, you can take Northcash online installment loans or borrow from friends to facilitate the generation of more capital.
#5 Adjust the Budget
Bankruptcy means that the business is not generating adequate cash to meet its current and long-term obligations. A company can adjust its budget by allocating enough money for utility bills, wages, rent and basic expenses for the running of the business and use the rest to repay debts.
You may also give up costs such as employee rewards, cash gifts, and end of year parties though you should approach the matter cautiously. Telecommuting may come in handy to save on office space and rent as you relocate to a cheaper office.
Some business may be compelled to lay off some staff; for example, replacing full-time with part-time employees.
#6 Look for Professional Help
You should also consider hiring a consultant who specializes in changing a failing venture into a profitable one. Most people avoid hiring professionals citing the additional cash outlay required; on the contrary, they bring value to the company if they can determine how to fix the problem.
Consultants may introduce new ways of tapping into new markets or reducing expenses. They may also suggest restructuring the debt making it more manageable for the company. For example, proposing a debt-equity swap to the creditors where they accept a stake in the firm instead of payment.
Facing your company’s financial woes is the beginning of avoiding bankruptcy attempts. You can renegotiate the repayment plan, change management, learn to separate business and personal finances, adjust the existing budget or engage a professional.
Is your small business trying to avoid bankruptcy?