Entrepreneur ME 08.2019

82 / ENTREPRENEUR.COM / August 2019

Five ways to avoid bankruptcy when starting a new company

by JIMMY HAOULA

Jimmy Haoula is Managing Partner of BSA, a growing law firm in the Middle East. bsabh.com

Money matters

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S

tarting your own business

is one of the most exciting

decisions you can take. But

it is imperative to follow

fundamental rules and keep

certain key considerations in

mind to avoid facing financial

issues that may lead to bankruptcy. Here

are five factors to keep in mind when

managing your finances as a startup:

1 / Set a clear plan of action

To succeed, your project must set out

a plan of action explaining all details,

including clear rules and regulations,

governing the workflow and explaining

the work method. Based on a good com-

prehensive business plan, a company will

be able to make smart decisions related

to location, pricing, and investment.

Without a good business plan, there will

be no bank loans, and no one will invest

their money in the intended project. Fur-

thermore, do not hesitate to spend a little

extra money to make sure that the basics

are legally covered. If you do not know

all the legal and financial duties for your

project, you will end up in trouble, and it

is usually less expensive to seek legal and

accounting advice prior to the occurrence

of any difficulty.

2 / Focus on the quality of products/

services (and market interest as well)

A product or service is the basis of any

business. However, if the quality of the

product or service provided is less than

the expectations of the customers, or if

there is another product in the market

that is better and more cost-effective, it

will not be purchased by many. Develop a

strong and authentic product or service,

maintain your existing customers, and

focus on targeting more.

3 / Do not borrow too much

Ideally, you may have a nice pile of sav-

ings hidden away that will help you build

your project, but it is more likely that you

will have to borrow some money. Banks

and financial institutions try to sell more

debt, and as attractive as it may sound

filling cashflow gaps with debts, when

there is a shrinking market in certain

economies, along with liquidity prob-

lems, this is absolutely risky and danger-

ous– more so in countries where certain

criminal penalties may be imposed if

the company’s directors or shareholders

are unable to pay off those debts. At the

same time, although the right amount

of loan for your small business depends

on the type of business, it is important

to ensure you will be able to get the best

return on your investment as well. You

should know the value of monthly inter-

est, the installments you will pay, as well

as the term of the loan beforehand. Try to

deduct loan payments from any expected

profits to understand what the loan

can cost you to ensure you repay it on

time. At the end of the day, getting more

money is not the solution for a business

to grow. Instead, a company has to hack

its way by finding more effective ways to

actually use its existing cashflows, assets,

and resources.

4 / And do not borrow too little

Getting started without adequate capital

is just as risky as over borrowing. If you

assume that profits will cover operating

costs, without ensuring adequate capital

to keep your project functioning, you may

not have the opportunity to bring in cus-

tomers who will help move the business

to make profits in the first place. It is

beneficial to carefully research the cost of

doing a particular business in your area-

setting a company budget, and sticking to

it, can give you an idea of how much you

need to have as a minimum capital.

5 / Give due consideration to money

collection and cashflows

Cash flow is the engine fuel for the busi-

ness to push it forward. At the begin-

ning of your company’s project, some

customers may offer to buy your product,

whether by debt, or forward sale, or in-

stallments, and you may probably give in

in order to retain them. However, if you

are not able to collect it in the future for

any reason, this debt may be the reason

for the failure of your project. For this

reason, make sure to rely on cash sales,

especially during the first few months

of the project. Once successful, you can

allow for more flexible and lenient sale

terms to some of your good and trusted

customers.

Whilst the reasons behind the failure of

many companies are varied, ranging from

lack of market interest to internal con-

flicts over strategy or execution, the most

common reasons are financial struggles

and bankruptcies.. Thus, it is important

not to neglect any of the aforesaid essen-

tial principles.