5 most common reasons behind the financial crisis in your business

reason behind crisis in business

Every business carries with it a different set of challenges, but a financial strategy and its inevitable outcomes remain the same. Stability is a big challenge to run any business. According to the study “Redefining Small Business Success” by the U.S. Small Business Administration roughly 66% of new business survives two years or more, 50% survive at least for four years and just 40% survive six years or more.

A financial game plan with tested outcomes can take you to different heights, after all, there’s a reason why finance is said to be the heart and blood of any business.

But if you think are lagging behind on this crucial aspect of your business, these might be a few reasons why:

1. Leveraging too much?

As easy as generating fund from leverage is, it comes cancerous if not treated consciously. However, that doesn’t mean that you should use 100% equity to create capital, as suggested by Lawrence Kotlikoff but balance it in such a way that there are adequate returns.

Moreover, poor local as well as international debt recovery can lead to severe damage to your credit score, an increase of interest and delayed instalments can hamper your business more adversely than you can imagine. Not only does your financial situation weaken but your goodwill also gets a major setback.

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If your debt is piling up, the best resort is to contact debt collection agencies. They do a great job and get you back the amounts you thought was lost long back!

2. Negative cash flows

Liquid cash and short-term assets form an integral part of your business. It is the lubricant that keeps the wheels of your business running. For day to day operations and for immediate situations, it’s important that adequate cash in hand is there at all times. Non-availability of it can have severe impacts on the business.

It’s important that your cash flows are running according to the budgeted plan. Deviation from the budget can act as an unbreakable hindrance to your long term financial plans and eventually hamper the ultimate goals of the organization

3. Poor accounting practices

You can’t manage what you can’t measure. Keep a track of your budget, expenses, and income in a systematic order to keep a close watch on each and every transaction of your business. Software that stores all your financial books along with professionals with the specialized expertise to use it has become a necessity for every business.

If you are building your dream, you certainly can’t afford to make silly errors that lead to its downfall and remain totally clueless about your cash record business Small numbers and minor mistakes can devastate your business. Inefficient people and bad choice of software for accounting can deceive you from seeing your own business transparently, thus not knowing when and how your business has adverse cash flows. Further conduct internal audit regularly to keep an eye on the transactions.

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4. Mismanaged Expenses

As sales decreases, most of us tend to cut down expenses that seem unnecessary. But it might happen that at this point of crisis you comprehend basic expenses as unnecessary, which will lead to further loss of sales. For instance, expenses on research & development or advertising expenses.

Instead, carefully scrutinize all your expenses – from to capital investments to administrative overheads, check everything. Negotiate where you can, cut off some minor expenses if possible and make your expenses as business-friendly as you can.

5. Inefficient Employees

Employees, as said, are the backbone of any organization, they have the power to either make or break your company. Their extraordinary skills are your barometer to identify them is enough to establish the success that you have desired. But on the contrary, it can also push your business in a pothole that you must have never imagined.

For instance, If a core member of your company resigns for a better opportunity, it affects your company with an immense cost which is mostly hidden. In 1 out of 4 companies, such cost exceeds $50,000! Cost to interview, hire and train a new employee to replace the old one can be a huge expense in terms of both time and financial cost.

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Hire the right talent. Realize that your business is built on your employees; the ones who can drive your organization to success. Not only hiring but retaining them is also as important. Giving them additional perks, flexible schedules and friendly office culture can help you in retaining your most valuable asset.

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