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Data & Analytics Blog

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4 Ways Small Businesses Can Avoid Financial Trouble

Posted by LPA Software Solutions on Nov 23, 2021 2:29:08 PM

shutterstock_1055652968-2Small and medium-sized businesses (SMBs) form an integral part of the economy. In fact, there are nearly  31.7 million SMBs in the United States. Unfortunately, many of these start-ups and small companies fail to become sustainable businesses.

According to data from the Bureau of Labor Statistics’ Business Employment Dynamics, over 20% of small businesses fail in their first year while 50% fail in their fifth year. Surprisingly, survival rates remain consistent year after year. This suggests that industry factors and a negative economy have little to no impact on an SMB’s survival.

Why do small businesses fail?

Lack of capital and poor cash flow management are two of the primary reasons SMBs fail. Most founders often have invested their life savings or taken out loans to start the company, leaving them with debt and a higher degree of financial risk. Since it’s impossible to forecast revenue growth and financial markets with complete accuracy, risk management is a critical part of any firm’s long-term plans.

A leading provider of financial analytics software, LPA, A Converge Company tackles how businesses can avoid bankruptcy and ensure healthy revenue growth.

1. Conduct careful financial planning

A solid financial plan keeps you focused as the company grows, when unforeseen crises occur, and when new challenges arise.

Here are steps to create your financial plan:

  • Set specific, clear, and realistic financial goals. If your company isn’t working toward anything specific, you're likely to spend more than you should.
  • Develop financial projections by looking at your expected income based on sales forecasts and estimated costs for supplies, labor, rent, and other necessities.
  • Plan for contingencies. This will help reduce potential downtime and give you access to emergency sources of funds.
  • Monitor results, along with your projections, to quickly resolve problems and see how you can further improve your company’s financial growth.

2. Organize and prioritize payments

Prioritize the payment of your business bills beginning with the most essential:

  1. Taxes
  2. Payroll
  3. Aged payables
  4. Rent and utilities
  5. Key suppliers
  6. Secured debts
  7. Insurance premiums
  8. Credit cards
  9. Other expenses

Differentiating between critical and less essential costs will keep you on track with your cash flow and prevent further debt. Organizing all your bills will ensure that all obligations are met and that there will be no surprise expenditures at the end of the month.

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3. Purchase the right insurance coverage

Insurance is your company’s best defense against any type of crisis. If something goes wrong and you don’t have the right insurance coverage, you may have to draw from your personal savings or take out more loans, which may result in greater financial issues.

4. Leverage technology

The more your business grows, the more numbers you must track. Balancing your books, the conventional way can be challenging, as it’s time-consuming and prone to errors.

By using financial analytics software, businesses can manage invoices, expenses, and payroll with greater speed and accuracy than manual processing. Automating accounting tasks also helps ensure financial data is recorded and analyzed with minimal room for error.

The more transparent and efficient your budgeting, spending, and forecasting efforts are, the earlier you can spot and mitigate potential issues.

Streamline your financial reporting capabilities with LPA. Contact us to know how our custom analytics software can help improve your company’s financial growth.

Topics: Financial Performance Management, Insurance