You can be on Entrepreneur’s cover!

Five Ways To Avoid Bankruptcy When Starting A New Company It is imperative to follow fundamental rules and keep certain key considerations in mind to avoid facing financial issues that may lead to bankruptcy.

By Jimmy Haoula

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

shutterstock

Starting 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 comprehensive 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.

Furthermore, 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.

Related: Three Ways To Go Big On Your Marketing (Even With A Small Budget)

3. Do not borrow too much

Ideally, you may have a nice pile of savings 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 problems, this is absolutely risky and dangerous– 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 interest, 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 customers 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 areasetting 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 business to push it forward. At the beginning of your company's project, some customers may offer to buy your product, whether by debt, or forward sale, or installments, 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 conflicts over strategy or execution, the most common reasons are financial struggles and bankruptcies. Thus, it is important not to neglect any of the aforesaid essential principles.

Related: UAE Entrepreneurs, Investors Welcome Proposed Bankruptcy Law

Jimmy Haoula

Managing Partner, BSA

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

Thought Leaders

20 Signs You're Destined to Become a Millionaire

Start making money at a young age. Warren Buffett sold packets of gum to his neighbors at age six!

Business News

This Woman Was Drowning in Debt Before She Tried 'Cash Stuffing.' Now She's Made The Highly Effective Practice a Full-Time Business.

A Texas woman was $80,000 in debt before she tried a method of budgeting called "cash stuffing." Now, she's not only paid off her debt but turned the budgeting practice into a full-time business to help others save.

Business News

Apple Cancels Its 10-Year Electric Car Project, Moves Some Employees to AI Division

Apple has remained quiet about its autonomous and electric vehicle development for a decade, though it took its EVs for many test drives last year.

Business News

James Clear Explains Why the 'Two Minute Rule' Is the Key to Long-Term Habit Building

The hardest step is usually the first one, he says. So make it short.

Living

Look Sharp with This Gillette Body Razor Set for $15

This Gillette Body Razor comes with nine refill blade cartridges and is on sale for $14.99 (reg. $24) for a limited time only.

Growing a Business

28 Habits for Building a Successful Life in Business

If you are committed to happiness and success, work these habits into your daily routine. Soon, you'll be making progress on autopilot.