3 Ways Small Businesses Go Broke Trying To Grow

When the cash is flowing it’s easy to get caught up in the excitement and start dreaming big. Who could blame you? One minute you are making bologna sandwiches to take for lunch and the next you are going to bed dreaming of when you will be able to buy your first Lamborghini. Before you start building that garage for your new ultra-luxury toy, it is a better idea to consider ways that small businesses go broke trying to get big and try to avoid them.

You didn’t start your business to make less than your last 9 to 5. Perhaps you’ve even had months or years where you did just that. When you are in a position as a small business owner to start looking over the horizon of “just trying to make it,” and start seeing the sunrise over “what is the next stage,” there should be a strong word of caution; too much too soon will ultimately kill a small business nearly every time. 

Small Businesses Go Broke Making Decisions On New Momentum 

Maybe you landed that big account or perhaps closing new business is feeling easier now. When things have been good for a while you started getting used to it. You begin to feel more confident financially. This is a good time to talk yourself out of taking on too much risk because things have been good for a while. 

Keeping your business financially stable over the long haul has a lot to do with one thing; not taking on too much debt. Many are the stories of failed entrepreneurs and small businesses that started attaining too much credit to grow and expand. Credit for your small business does have its place, but it is the wise small business owner who does not overextend themselves right away. Small growth is better than being another statistic in the percentage of how small businesses go broke by taking on too much debt.

Borrowing Money To Solve Cash Flow Problems Leads To Disaster 

If there is any problem with making decisions in panic mode, it’s making decisions when your checking account is looking lean (or starved to death). The natural incorrect reaction to this problem is borrowing money when the Receivables either aren’t there or coming in as fast as you need them to. 

If money isn’t hitting your bank account fast enough, it could be as simple as changing your billing terms and getting in touch with your customers sooner when they owe you money. Small business owners tend to get a little too emotionally connected to their customers. So much so that they feel awkward about asking for invoices to be paid on time, especially when they are well in arrears. Don’t be that small business owner. If your payment terms are 30 days, change it to 15 days. Call and check on payment status before your invoices are overdue not after. Being able to forecast when money is coming in and plan for it will help you better understand what your monthly revenues are and how you will cover them without borrowing money you don’t have to cover things that could have been paid for already. 

A cousin to borrowing money you don’t have is borrowing money from sketchy sources. It is very easy to go the Cash Advance root when money is critical and you don’t think you have time to wait through the approval process of a conventional loan. That is usually a sign that you’ve let your money situation languish a little too long. Cash Advance companies make money preying on desperate small business owners with their quick money and ultra high-interest rates. Don’t fall for it. You’re signing your business’s death warrant. Small businesses go broke when they ignore their financial situation too long and then make desperate decisions to fix it. 

Small Businesses Go Broke When They Don’t Know Their Operating Costs Well Enough  

Any well-run household has a good budgeting strategy. The same goes for your small business. You might know what you spend on business expenses and operating costs but do you solidly understand why you are spending what you do and why it is necessary to do that?

Operations managers are great at taking a look at expenses and always finding ways to operate more efficiently with less expense. Have you done that with your business lately? What is it costing you to have employees or office space? Why? Here are some ways that small businesses operate too expensively:

• Not comparison shopping for benefits 
• Hiring too many full-time employees 
• Failing to have approval policies in place for purchasing 
• Not pricing their products accurately
• Not seeking less expensive ways to provide their product or service

What are you paying to have employees? Are you providing benefits? Using a payroll service? What about Workers Compensation? How do you know what you are paying for these services is actually what you should be paying? Keeping apprised of better ways to provide for our employees and find more efficient ways to manage them goes a long way in keeping operating costs low. There are better ways to pay for having employees than you might realize. 

PEOs are great resources for keeping employee costs at a minimum. They can also help small businesses understand how they can make more efficient hiring decisions and ways they can avoid having too much headcount when it isn’t needed. 

Staying Informed On The Financial Health Of Your Business  Will Save You Every Time 

If you want to keep your small business from being one of those small businesses that go broke, you have 3 new ways to avoid it. The bottom line is this; keep it real when it comes to growing and decide small over time is the best way to do it. Don’t bury your head in the sand when it comes to your small business’s financial health and keep finding ways to do more with less expense. If you do those 3 things you should enjoy a bright future and maybe you’ll have that special new car in your brand new garage in no time.