Keeping Tabs on Your Business Finances and Avoiding Bankruptcy

Good budgeting can keep your small business fiscally sound and safe from bankruptcy. Here are budgeting and financial tips from the pros.

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Sandra Beckwith

Sandra Beckwith has been writing for traditional and online publications since she sold her first magazine article while still a journalism student. Her articles in business, consumer, trade, and custom magazines; in corporate, alumni, and nonprofit organization publications; and on websites and blogs help readers learn more about successful initiatives and interesting people, or about how to do something better, faster, or smarter.The author of three traditionally published nonfiction books and a past contributing editor of three trade journals, Beckwith writes frequently on small business, logistics, supply chain, and work-life balance topics.She is also a national and regional award-winning former publicist who teaches authors how to market their books. Her book marketing website, BuildBookBuzz.com, has been recognized for excellence by four organizations and is ranked in the top 10 globally for book marketing blogs. She has served on the board of directors of the American Society of Journalists and Authors, where she remains an active volunteer and member. She is also a member of the Association of Ghostwriters. Beckwith is a graduate of Utica College of Syracuse University, a past member of its Raymond Simon Institute board, and a recipient of its Outstanding Public Relations/Journalism Alumna Award. A resident of a sweet little Erie Canal village in Western New York, Beckwith listens to audiobooks every evening while walking along the canal's original towpath for exercise. Her hobbies include eating, sleeping, and spending time with friends and family—but not necessarily in that order.

Three types of bankruptcy

Depending on your specific situation, you may have a variety of options open to you. Here's a brief primer on the different types of bankruptcies:

Chapter 7 liquidates assets and distributes proceeds to creditors before dissolving the business.
Chapter 11 is often recommended when the company needs to reorganize, rather than dissolve. This option protects business assets while the firm makes necessary changes.
Chapter 13, the option available to consumers, can also be used by sole proprietors. Owners get protection from debts while they reorganize and establish a repayment plan.

As of February 20, 2020, the Small Business Reorganization Act of 2019 makes the Chapter 11 process for small businesses faster and less expensive.

Avoid business bankruptcy

With proper budgeting and financial management, it's possible for a business to avoid bankruptcy altogether. Many new business owners mistakenly believe that they need all the trappings of a large company before they can be taken seriously. They rent office space, hire staff, and spend money on advertising.

This is a big mistake, says Eric Carrell, co-owner of Silent PC Review for two decades. "We never wanted to bite off more than we could chew in terms of overhead and leave ourselves in a position where we couldn't pay bills if we had an off month," he says. "We nixed the office, hired cheap labor, and made sure our margins were cushy."

Why you need a 12-month cash-flow projection

"Businesses go bankrupt from a lack of cash, not a lack of profits," says Rob Stephens, founder of CFO Perspective.

Project both income and expenses month by month on an ongoing basis, but don't stop there. Each month, compare projections to actual numbers and make any necessary changes.

In addition, when creating your income projection, be sure to enter the estimated income according to when it will be paid, not when you plan to bill it. "For example, if you have a contract that's completed in January, and it takes 60 days to get paid, don't budget the sales in January. Budget them in March," says Brian Cairns, CEO of ProStrategix Consulting.

"Cash-flow management is about making sure you will have cash available when you need it by receiving cash receipts sooner or pushing payments out later," Stephens says. "Giving yourself more time to plan for potential times of low cash means giving yourself more options to avoid a cash crunch."

Use the tools in your accounting software

You probably have access to helpful budgeting tools at your fingertips in your accounting software, perhaps without even realizing it. A quick click around toolbars and menus of most programs will reveal sophisticated budgeting tools that can save time and headaches.

"These tools can give you budgeting ideas with your operating figures right in front of you," says Darryl Smith, founding partner of Florida Car Accident Lawyer Team.

Cut expenses and put savings in an emergency fund

If you haven't been thrifty about expenses yet, now's the time to start. Rather than putting money saved back into the business, though, stash 10 percent in a savings account.

"This can be your emergency fund that will always keep growing and potentially save you if something unexpected happens," says Luka Arezina, co-founder of DataProt.

Tap into your bank's wisdom

Small-business bankers want to help, says Lorraine Romano, head of business banking at Affinity Federal Credit Union. They can offer advice and valuable insight that leverages their experience with similar businesses in your area.

"These additional services aren't on the financial institution's website, and you won't find them in any brochure in the lobby," Romano says. "Nevertheless, they can be among some of the most powerful and important services your financial institution provides." Bankers are also good referral sources when you need an accountant or attorney.

If your business is struggling with debt, consult with an attorney to explore options. Bankruptcy isn't the only answer, but if you're considering it, you'll want professional guidance.