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4 Internal Causes of Small Business Bankruptcy

Posted on July 11th, 2013

For small businesses, there are many factors which can lead to bankruptcy. A large number of these factors are out of the business’s control, such as external market conditions, poor company location or a small customer base. However there are certain internal operations, which when poorly executed, can lead to bankruptcy.

1) Insufficient Planning

Many small businesses begin as the life-long dream of a professional who decides to leave the corporate world. Before opening a small business, potential owners should calculate start-up costs, as well as an operational budget for the first year.  Owners should also plan for worst case scenarios, such as initial low business, potential slow seasons and unforeseen accidents.

2) Low Savings

Sufficient planning is as important as having the proper savings for opening and operating a small business. Owners should be prepared to have a proper cash cushion to keep the business afloat in emergency situations. It is recommended that owners set aside six months of savings for both the business and themselves before opening.

3) Lack of Financial Discipline

When businesses are faced with low income they sometimes turn to cheap, quick-fix schemes to generate business. Unfortunately, these frequently prove to be ineffective and a waste of precious capital. The costs of these quick-fix schemes often require additional loans which only increase the business’ risk of bankruptcy.

4) Poor Accounting

In an effort to save money, some businesses will steer clear of bookkeepers in favor of balancing the books themselves. Accounting is often pushed aside amidst seemingly more important elements of the business, leaving owners in the dark about their true financial state.  Ideally, business accounting is the responsibility of one employee who can set aside time to communicate the business’ financial status to the company owner.

 

For more information about the causes of small business bankruptcy or how to responsibly plan for your small business, please contact Skinner Law Firm LLC.