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5 Ways to keep your startup from going bankrupt

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An overabundance of debt is a key aspect of most business bankruptcy filings but it’s not the only factor, especially in the startup world. While bankruptcy can be a useful tool for troubled organizations that need to restructure debts and improve cash flow, avoiding the issues that contribute to financial instability can improve both the short- and long-term viability of your company.

Keep up with current cash flow

No matter how good your ideas are or how many big-name investors attach themselves to your project, no company can survive without revenue. Take, for instance, New York-based startup MoviePass which offers a subscription-based model to entice moviegoers into theaters more often in exchange for discounted tickets. The problem here was that the company put the cart before the horse, touting ideas about potential ways to monetize its rapidly growing user base before it figured out how it was going to produce revenue in the short term. Despite significant investor interest, the company was unable to negotiate reduced rates with theaters themselves, leading to negative cash flow and eventual disruption of the business. MoviePass had to go into a scramble to borrow funds, raise prices and restructure its offerings to remain afloat — all of which can easily lead to bankruptcy.

This is just one example of why it’s imperative to have a plan for current and future revenue. Otherwise, you run the risk of running out of money before you ever reach your potential.

Don’t grow too fast

This may seem counterintuitive, but growth can be just as dangerous as stagnation. This threat often takes the form of expanding into new markets without a firm grip on your current ones, generating demand without the necessary production capabilities, scaling production without the requisite demand or having too many products or services to do any of them particularly well. In any case, there’s a significant risk of burning too bright too fast, hurting your ability to sustain the business.

Avoiding growth that’s too good to be true means having reliable insights into market trends by keeping up with industry news and participating in business-related conversations on networking sites such as LinkedIn. You’ll also need to develop a keen understanding of your customers by incorporating reviews, complaints, social media chatter and other feedback into your business strategy to ensure that you’re not under- or overshooting the mark.

Keep occupancy costs low

Startups have a reputation for large, open office spaces in trendy downtown locations filled with comfy couches and ping-pong tables. While it’s true that good workplace design has a positive impact on productivity and revenue, the typical trappings of these fledgling businesses can also be expensive, especially as commercial rent prices continue to climb. These costs can hinder growth and decrease your company’s financial agility, causing you to lose out on deals or opportunities for expansion.

Your startup’s limited funds would go much further by forgoing the “startup experience” in favor of more economical of office arrangements. Remote work is becoming increasingly common, with more than half of professional worldwide telecommuting half the week or more and a full 70 percent working from home at least once a week. While developing a completely remote workforce would be the most cost-effective option, there are a number of alternatives including:

  • A small central office “hub” with remote worker “spokes”
  • Executive suites that provide flexible workspaces
  • Coworking spaces

This last option, which includes companies such as WeWork, can also provide the startup feel and help you connect with other entrepreneurs in a community-based environment.

Attract and retain good talent

Another thing startups are known for is attracting entrepreneurial, creative workforces. Startup workers are often driven by the ability to make a real impact in the direction of a company and having employees that are engaged and excited about the company’s journey is an excellent sign of long-term success. In fact, studies have found that happy employees double revenue and boost profits up to four times over an average company’s.

The key here is to strike a balance between hiring top talent and keeping costs down. Many early-stage startups offer equity in exchange for a lower salary, especially for key hires such as C-level executives and department heads. You could also provide non-monetary perks like remote work capabilities and ample time off.

Protect your assets

Loss of assets is one of most significant contributors to business bankruptcy so securing them needs to be a priority. The first step is obtaining comprehensive insurance coverage. This goes beyond basics like general liability but the specifics can vary significantly depending on your industry and business activities.

Processing or storing customers’ personal and financial information, for instance, may require coverage for losses related to data breaches. This is especially prudent when it’s been found that 60 percent of uninsured businesses that suffer a data breach don’t survive another year. Similarly, it’s a good idea for consulting firms to carry professional liability insurance to cover losses stemming from mistakenly providing inaccurate information or bad advice.

The next step is ensuring that your company is legally protected. Business plans, marketing ideas, proprietary software, funding strategies and other forms of intellectual property are among the most valuable assets a startup owns. They need to be protected via copyright, patent and trademark registration as well as a secure IT infrastructure.

Of course, being proactive is ideal. Think about the biggest risks your company faces and develop a strategy for handling worst-case scenarios. Once you’ve got the appropriate amount of protection in place, review your strategies and coverage regularly to ensure that they continue to serve your changing needs.

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