You’ll have heard the statistics about the percentage of companies that end up closing within their first year. It’s somewhere in the region of 20% – 40%, and the numbers only get worse as the years roll by. They say that around 50% of small businesses will go out of business before they reach the five-year mark. So what gives? It’s often not because the idea behind the company is bad, but because the business has run into financial difficulties. Sometimes, it doesn’t matter how good your concept is; if there’s no money, then there’s no other choice than to close the doors.
In this blog, we’re going to run through some of the most common reasons why businesses run into financial troubles. The good news is that many of them can be overcome (or at least the severity can be reduced) with a little planning.
Cash-Flow Issues
Of all the financial problems, the most common one that affects small businesses is cash-flow issues. There are plenty of bills to be paid, but if there’s not enough cash in the register (either literal or metaphorical), then the company is going to struggle to pay those debts and keep the lights on. Sometimes, cash-flow problems are unavoidable. At others, they happen because the company was a little too cavalier. For instance, they overinvested in stock or tried to expand too quickly. Talking with an accountant can help keep these problems at bay.
Costly Mistakes
Everyone could be going well for a business, and they could still end up running into financial difficulties. If they haven’t taken the time to properly secure their website and payment processes, then they could end up with costly fines (and not to mention a bad reputation with customers). If your company stores credit card data, then it’s really important that you’re PCI compliant. If you’re not, then learn more about PCI plus. It might just prevent you from acquiring expensive fines that could cause your business real harm.
A Downturn in Business
You never know what’s going to happen in life. Indeed, if there’s one thing that the coronavirus pandemic has taught us, it’s that you should never take anything for granted! There are many businesses out there that thought everything was going well, but then the pandemic struck, and they just couldn’t stay afloat. A downtown in business will happen from time to time, even if there are no external factors (like COVID-19 or an economic crisis) to blame. The best way to combat this threat is to try to keep a reserve of cash to hand that you can use to ride out the less busy periods.
Pumping Money Into Wrong Areas
Another costly mistake is when companies spend money in the wrong areas or when their gamble doesn’t pay off. For example, if they allocate a lot of money to their marketing campaign, but the campaign fails. A return on investment isn’t always guaranteed! The best way to prevent this issue is to avoid putting all your eggs in one basket.