How to Avoid Bankruptcy – for Small Businesses

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Danger Chasm Ahead

It is vital that we all know how to avoid bankruptcy here we look at simple ways to avoid the potential trap.

Ok! I’ll explain that heading soon. First of all – in 2014 the Bank of England said that over 50% of business start-ups fail within the first five years. So it’s important to avoid bankruptcy in you Small Business.How to avoid Bankruptcy pic 1

Many make it past the ” start-up” phase only to falter when trying to grow.

So it’s vital that you know how to stop your small business growth ending in bankruptcy.

Before we look at that I’d like to ask an important question.

Does a Bigger Business Bring Larger Profits?

This is not a question that ever bothered me when I started my own business.

But it has many times since.

I had the idea that I’d get the turnover as large as I could and there it would stop.

This was just so wrong.

A very small business with one or a handful of people is often more profitable than a larger enterprise.

How come ? I’ll tackle that a little later. In the meantime:

What do you want your business to be

I’ve al;ready told you what I thought I wanted, ” as big as it gets” but did I really.

Having left the commercial rat race to be free of the stresses (fool) and live the lifestyle did I really want to return to a life of meetings, HR problems, chasing the sales force and everything that goes with a larger enterprise ?

No I didn’t.

In that case I should have realised that what I wanted to do was to maximise my profits whilst staying at a manageable and enjoyable size.

To do this I would have to understand what hapens to profits when businesses grow; and I did’t.

If like me you don’t really have a firn grip on this you could be heading for a financial disaster.

The Profit vs Employees statistics.

bancruptcy 2That’s a nice graph, but whats it trying to say?

I few years ago I worked with a friend of mine who owned a cleaning business.

Like many people including myself and quite possibly you, he quickly started off with himself and quite quickly took on another person to help.

Between the two of them they made more profit than the owner had done alone.

So, naturally, he took on another and another until he had five staff.

At this point something strange started to happen he found himself no longer doing revenue producing work, in his case cleaning. He was spending his time organising the others.

Time melted away as he did the wages, checked the hours worked, ordered more material and delivered them to the site for the staff to use.

How to Avoid Bankruptcy

His solution was simple. Hire someone else as a supervisor and give someone responsibility ( part-time ) for wages, attendance etc.

Now he had one and a half people who were necessary but not directly increasing the money coming in.

Just as I had been he was now worse off than when he had just three people. This isn’t exactly progress.

He had two choices go back to a three-man business or take on more staff until their additional profits covered the cost of the people looking after all of them.

As you and I know the second policy will take some time. How long will depend on the type of business and the number of staff involved.

One thing is for sure, it’s going to cost!

And so will downsizing.

A Mountain to climb

bancruptcy 3Growing a business is just like climbing a mountain.

All goes well putting one step after another, then, a crevasse.

When I did my first business plan I only planned for the startup and didn’t consider the inevitable growing pains.

So how do you cope with the sudden great gap to traverse?

The first answer is an old favourite:

Plan for it

I can’t remember how many small businesses I’ve known who have ended up stuck at this point.

The simple answer is that once your start-up business plan has become outdated I would have a sit down and decide exactly where you want to go.

If you are really turned on this could be a part of your start-up plan.

There is no point growing and growing when you would be happier with a smaller and more profitable business.

If you decide to grow then we must plan for it. From this plan you will be able to predict how much money will be needed and for how long in order to cross the chasm.

Take a Running Jump

Sorry that’s not a personal comment. I simply mean financially.bancruptcy 5

It’s definitely a time to talk it through with your accountant and ensure that you will have enough finance to clear the chasm.

It may be that you will have to find a source of finance, or, like me you may be able to save enough in the run up to this stage of expansion to see you safely across.

Bank of England figures show that more than half of business start-ups do not survive the first five years. Starting is not the big hurdle but growth is.

Stop your Growth ending in bankruptcy

What more can I say other than Plan. With banks so reluctant to lend there has never been a time when planning for growth was more important.

Be certain that it’s what you want.

There’s no shame in being a happy , healthy and prosperous Very small business or even a sole trader.

If being up there with the big boys is for you then make sure that you have a sound expansion plan and the finance to support it.

If you fall off the mountain it’s a long way to the bottom and it hurts.

Are you Going for Growth or Incresing profits with the staff that you already have? – Please let us know.

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