3 Ways Your Startup Can Avoid the Bankruptcy Trend

It’s an unfortunate and well-known fact that the majority of startups ultimately fail. Many entrepreneurs think that if they can only keep their business alive for the first few years, they’ll be out of the woods. The truth is that more than half of businesses don’t make it past the first five years.

While this is especially true for small companies still learning their industry, many multi-million dollar companies—the likes of which can make investors drool—have found themselves in a state of bankruptcy. Just look at Avaya, Kodak, Karhoo, and a plethora of other impressive tech companies.

Big or small, countless companies that seemed relatively stable to outsiders have gone bankrupt. Why? It could be a simple lack of incoming revenue that stunts growth, or even the result of a product line not evolving to keep up with competition and becoming obsolete. It could also be overvaluation, poor investments, or expanding a business too soon.

Creating and growing a business can be a tricky balance. You want to move fast, but not faster than your budget can afford, and you have to spend money to make money. But where do you stop? Here are three tips to help keep your business above water and thriving.

1. Take one step at a time and focus on priorities.

It’s easy to spend cash faster than we can earn it. Many companies want to do everything from the very beginning. They end up spending thousands of dollars on trade shows, airfares, marketing efforts, prototypes, employees, and more.

Startups can burn through a majority of their investors’ cash before they see any return on their investments. One startup, Beepi, recently closed its doors. It was a marketplace for people to buy and sell used cars, and while they had raised almost $150 million in funding, they were spending close to $7 million a month at their peak. In business, it’s crucial to understand what you NEED and what you can do without.

John Pope, co-founder, and CEO of Jive Communications, recently acquired by LogMeIn, explained how he and his co-founders focused all of their time and energy on their product first. Founded in 2006, they didn’t even establish a marketing department until 2013. Instead, Pope said that everyone on their small team wore multiple hats and penny-pinched wherever possible.

2. Remember that money is made to be spent—responsibly.

Reinvest in your company. Most startups need to make this their primary focus. Why? Because new businesses can’t compete with the big dogs yet. If a business plans to be a serious contender in the marketplace, an aggressive expansion strategy means aggressive reinvestment — though it varies from company to company.  

Have a strategy and apply funds according to your development plan and company needs. Many businesses start by making improvements. Could you improve your infrastructure? Streamline manufacturing? Have customers asked for improved product features and capabilities?

These different endeavors can help increase your profits and decrease expenses. So with your future and growth in mind, reinvest responsibly.

3. Have a plan in place for paying off debt.

Debt can be a great way to raise money to finance the growth and expansion of a business, but it can also be dangerous. As a business owner, you need to have a plan in place to pay it off, and you’ll want to start early. With personal debt, you generally want to pay off the loans with the highest interest rate first, but with a business, it’s a little different.

Once you’ve paid your employees, you can focus on overdue bills from key suppliers. To improve cash flow and allow yourself more money to pay down debt, it can be a good strategy to delay payment to suppliers. However, once you’ve reached the latest deadline, pay off these outstanding invoices as fast as possible. These debts may not cost you interest, but they can be costly for your business’s reputation.

Next, you will want to pay off debts that impose steep penalties if you fail to pay on time — particularly if you provided a personal guarantee or the debt was secured with valuable collateral. Only after these steps will you want to focus on ranking and paying off debts by interest rate, paying them down one at a time while making minimum payments on the others.

4. Understand that there’s always an opportunity cost.

Once a business starts seeing a profit, many feel that they should spend more — even when they don’t have to. Focus on cash flow and growth rather than impressing people. Of course, you want your employees and office to be comfortable, but does it need to be excessive? Instead of throwing things out when they break, consider repair costs. Instead of staying in a five-star hotel while on a business trip, stay in a comfortable, but a reasonably priced three-star hotel.

Once you start opting for the easier, fancier, or more fun route, you’ll find that it’s hard to go back. And there’s always an opportunity cost. Consider the money that could have been made by reinvesting it back into the company to improve your product offering (and avoid becoming obsolete) or putting it somewhere more valuable.

There’s a healthy balance in everything. Don’t discard your frugality as you become successful. Big expenses should and will be made with the business’s strategy in mind. Simply remember that your startup doesn’t have to do everything right away. Take one step at a time, spend money responsibly, and take a good look at your opportunity costs.