Having to declare bankruptcy is a scary proposition for many. And while no one ever wants to find themselves in a situation where there’s no other alternative, sometimes life’s events simply make it inescapable.
Unfortunately, small business owners make up a high percentage of those who end up filing for bankruptcy or personal insolvency in Canberra. Poor cash flow, bad budgeting, unexpected events, illness, and excessive spending can all contribute to a financial downfall that leaves the business owner(s) struggling to make ends meet.
Luckily, there are certain measures you can take to prevent the likelihood of financial distress.
Here are four important tips that could save your business from bankruptcy…
Don’t put all your eggs in one basket
Signing a major deal can be an exciting milestone for a business, but when it becomes your main source of income, it can be quite risky. If that client experiences financial hardship and fails to pay your invoices on time, your business will suffer.
To avoid this from happening, you should:
- Be wary of flashy exteriors – some businesses are deeply in debt despite appearances;
- Keep on top of invoices and ensure they’re paying within your terms;
- Consider asking for a formal credit agreement with a personal guarantee from the business owner.
If you are supplying goods, make sure you register a PPSR – as this is the only way to recover goods if the customer’s business fails.
Ideally, you should also plan to diversify and bring a few new clients on board to off-set the risk.
The same applies if you run a business that relies heavily on just one or two suppliers. If they were to go belly up, could you continue your business? Save yourself the future stress by establishing relationships with other suppliers and having Plan B and C ready to go.
Review your accounts regularly
$10,000 owed is not $10,000 in your account. When debtors are allowed to get slack with payments, this can create trouble for you. Stay on top of overdue accounts, and follow a strict accounts receivable process.
Set payment terms based on what is best for you, and consider offering discounts to those who pay on time.
Don’t live beyond your means
Unfortunately (in our experience), most bankruptcies occur because people simply live beyond their means. It’s easy to get caught up in the “we need” cycle – especially when you’re running a small business.
The best way to counter this is to never spend mindlessly. If you create a plan and stick to it, then every purchase and expense is anticipated. Putting a little aside for a rainy day is also more important than upgrading to the latest flashy system or fitout.
Budgeting and saving leads to financial freedom, which then allows you to expand with confidence.
Get a trusted advisor
A trusted financial advisor is worth their weight in gold. Not only can they help you forecast, budget and strategise, but they can also help you negotiate and avoid bad credit arrangements that could collapse your finances in the future.
Business is money changing hands – so the best person you can have by your side as you buy and run your business is someone who understands how to make that money work for you.
If you need help creating a financial and business plan, or if you would like to chat with one of our debt solutions specialists, call RSM on 6217 0300 or visit rsm.com.au/canberra.