Many business professionals face the same challenge: how to avoid accumulating debt in their business. The simplest answer is to spend less than you earn, but it’s often not that easy. About half of small businesses fail within five years, and one of the primary reasons is that they cannot control their spending. This can lead to debt accumulation and, eventually, the failure of the business.
This blog post will explore some of the more common causes of business debt and offer practical tips for avoiding them.
1. Never underestimate your expenses
One of the most common causes of business debt is underestimating expenses. When starting a business, it’s easy to be overly optimistic about how much money you’ll need to get started and how quickly you’ll be able to turn a profit. However, reality has a way of catching up with you, and if you don’t have enough cash on hand to cover your expenses, you’ll quickly find yourself in debt. Many businesses fail because they run out of money before they’ve had a chance to become profitable.
To avoid this trap, it’s crucial to create a realistic budget and stick to it as closely as possible. You want to make sure you have enough money to cover your costs and a cushion for unexpected expenses. Estimate high rather than low when it comes to your costs, and don’t be afraid to revisit your budget periodically to ensure it’s still accurate. Change is inevitable in business, and your budget should reflect that.
2. Manage your personal expenses
Don’t use your business funds to cover personal expenses. This can create a messy financial situation and make it difficult to track where your money is going. Many people use their business funds for personal purchases and can’t make the required payments on their business debt. More significant loans like mortgages can put you in a difficult financial bind if not managed correctly from the beginning. Paying off your home loans with business funds is a risky proposition that can leave you in debt and without a home.
Inversely, many business owners dip into their personal savings to finance their business, leading to personal debt problems. It’s important to remember that your business is its own entity, and you should keep your personal and business finances separate as much as possible. If you need personal funds to finance your business, make sure you have a clear plan for how and when you’ll pay yourself back.
3. Plan for slow periods
Another common cause of business debt is failing to plan for slow periods. Even the most successful businesses have slow periods from time to time, but if you don’t have enough cash saved up to cover your expenses during these periods, you’ll find yourself struggling to make ends meet. The best way to avoid this problem is to create a reserve fund that you can tap into when business is slow. By doing so, you’ll ensure that you have the resources you need to weather any storm.
Try to avoid borrowing money to cover your expenses during these periods, as this can lead to a dangerous cycle of debt. If you do need to borrow money, make sure you have a solid plan for how you’ll repay the loan. You want to avoid putting your business in a position where it can’t recover from a slow period.
4. Manage your inventory wisely
Finally, many businesses are in debt because they fail to manage their inventory effectively. If you’re constantly overloaded with inventory that you can’t sell, it will tie up your capital and prevent you from using it to grow your business. It’s essential to keep a close eye on your inventory levels and only order what you know you can sell to avoid this problem.
You want to strike a balance between having too much and too little inventory on hand. Too much inventory can tie up your capital and prevent you from growing your business, while too little can leave you unable to meet customer demand. You can avoid this common pitfall by keeping a close eye on your inventory levels and only ordering what you know you can sell.
Debt is a serious problem for many businesses, but it doesn’t have to be an issue for yours. By being mindful of your spending, managing your personal expenses, planning for slow periods, and managing your inventory effectively, you can avoid accumulating debt and instead focus on growing your company. Don’t let debt drag your business down-take steps to avoid it from the start.