If you’re an entrepreneur and are experiencing times of financial insecurity, perhaps you’re wondering how to avoid insolvency.
Deciding to start your own business is incredibly exciting. However, it’s important to follow fundamental practices and keep specific key considerations in mind to prevent facing financial difficulties that may lead to insolvency.
Here are some steps you can take to prevent insolvency as an entrepreneur.
Avoid borrowing too much
In an ideal world, you’ll likely have some savings stashed away to build your business venture. But chances are, you’ll have to borrow some money. If this is the case, then avoid taking on too much debt. If you can’t refinance or service the debt, there’s a risk of default. Not only is this destructive to your credit score, but it could also result in legal action.
To stop this from occurring, you must determine how much the loan payment is and how it corresponds with your budget. If it turns out it’s unmanageable to afford this monthly payment, keep well away from borrowing money at all.
Give precedence to debt repayment
An entrepreneur will run into difficulties when they overextend on repayments. The best way to avoid overextending is to avoid borrowing at all costs.
The second-best way is to make sure you’re prioritizing debt repayment. When it comes to calculating your debt repayment plan, concentrate on secured debt (like a loan secured by a piece of equipment) together with high-interest debt first.
If possible, steer clear of unsecured debt completely (like a credit card debt). When discussing a loan or financial agreement, be sure to push for the best terms possible and ensure you get written confirmation of the agreement.
Ditch needless expenditures
Be sure to double-check your credit card and bank statement every month. Are there any unnecessary expenses being incurred? Can you eliminate one of your recurring charges, such as software that you never use?
Avoid careless bookkeeping and record keeping
If an entrepreneur doesn’t have a good grip on their bookkeeping, chances are they’ll run into trouble. A businessperson with sloppy bookkeeping will often wonder why performance isn’t what they anticipated – income is often worse, and overheads are higher than they thought. By the time the issue is identified, it’s usually too late to be rectified. So, make sure you keep your books up to date.
Write a business plan
If you’re an entrepreneur who has started very small and your business “plan” merely exists in your head, then you’ll want to think again. As your business grows, there’s an acute need to write a business plan even though you may feel otherwise.
Every entrepreneur should have a written plan in place that illustrates proposals and procedures pertaining to cash flow, operating costs, capital outgoings, input budgets, performance goals as well as a way to monitor performance.
Implementing a business plan means you understand the overall view and can successfully target your activities towards accomplishing your business goals. By not having a plan in place, you risk derailing your business. Actually, the absence of a plan means you won’t know which path you’re supposed to be taking in the first place.
A written plan for retirement
Equally important to writing a business plan is crafting a retirement strategy. Consider who will take over when you retire. For instance, if you employ some of your children in your business, which of them is better suited to succeed you? Nonetheless, have you considered how you’d deal with the near-certainty of conflict and offended feelings brought about by your decision?
It’s worth thinking about how your succession strategy will be financed. Fortunately, there are numerous possibilities available, including transferring property, loans, or a payment arrangement to execute a succession plan. Whatever you decide, it’s best to discuss your arrangements with a professional to deal with tax, legal and other matters associated with your retirement strategy.
Evaluate insurance policies
Like most entrepreneurs, you’ll likely be paying out insurance on numerous things such as health, property and disability. And premiums often increase each year, forcing cash flow away from more constructive projects. It’s time to [review your insurance policies](http://www.business.com/articles/cut-insurance-costs/) by talking to your insurance agent.
Think about what options are available. For example, by taking out a policy with a greater deductible, you’ll usually bring down your monthly premium quite substantially. It’s also worth considering the various types of life insurance options available. While term insurance is less expensive, a whole life policy provides you with the opportunity to borrow against its cash value.
It’s best to speak with your advisor to ascertain your requirements and the best way to tackle them, depending on your current situation.
Hasib Howlader is a director at Hudson Weir, a successful Insolvency Practitioners based in central London. The firm provides insolvency advice to a range of companies (one-man bands to larger companies) and individuals. Hasib has a wealth of experience in a variety of financial matters, having had successful careers at both UBS Warburg and PWC, before moving to direct his own Chartered Accountancy practice where he has overseen exceptional growth over the past ten years.
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