Common mistakes that lead to bankruptcy (and how to avoid them)

Unfortunately, too often things don’t go to plan and they find themselves with no business, a long-list of creditors and stripped bare of personal assets to fall back on.

According to the Australian Bureau of Statistics (ABS), almost 50% of all businesses fail in the first four years of operation. It’s a damning statistic, and while the reasons are many and varied, the most devastating outcome is that good people lose everything, including their personal assets.

It has been one of the hardest things I’ve had to witness in my 20-plus years in insolvency accounting, wealth advice and finance, and what makes it even more heart breaking is that in most cases, the bankruptcy situations were completely avoidable if more careful planning had been put in place from the beginning.

 

You don’t know what you don’t know

One of the main reasons that business owners and entrepreneurs risk their personal assets is simply a lack of knowledge.

They’re scaling up and all their resources and thinking are going into their business. For this reason, it’s not uncommon to see a lack of a proper business plan or business management, which in the long-term becomes detrimental.

Generally, people also don’t like to think about the ‘what ifs’, so they neglect to address threats like bankruptcy in the early stages of setting up the operation.

If you’re starting or running a business, here’s six tips to keep your business interests from draining your personal assets.

 

1. Seek advice

While money is tight in the early stages of a business, don’t compromise the potential success of your business by not seeking advice.

According to research, only about a quarter of Australian SMEs use external consultants in their decision-making processes.

It’s important not to see advice as a cost and shy away from it. Turn it around and see it as an investment in your future from which everything else will flow.

 

2. Get the right protection

One of the most common mistakes is being under-insured. When we talk of a robust financial plan, we consider not only wealth creation but wealth protection and, ultimately, distribution. Insurance falls squarely in the protection piece.

Personal risk insurance, such as ‘key person’ insurance is a must if a business relies on a few key people to generate revenue. Other insurances to consider include business expenses cover, income protection and total and permanent disability cover. Where there is more than one owner, a buy/sell agreement backed by an insurance policy is a smart way to ensure there is protection for all owners in the event of accident or illness affecting one principal.

 

3. It’s all about structure

Another common mistake is a lack of business structuring. This is really where professional advice can add significant value. By using trusts, including self-managed super funds, company structures and even a different capital structure within a business, it can provide asset protection as well as potential tax efficiency.

 

4. Check your ego

Bowing to ego is a common slippery slide for entrepreneurs and business owners. I still remember clearly a case I was involved with where a high-profile real estate agent decided he didn’t need the network he was associated with. He splashed out on a new office with an expensive fit-out, leased a luxury car and waited for it to all happen. He had no business plan and operated on the ‘build it they will come’ belief. Except they didn’t come and he was left with massive expenses that sent him and his family into bankruptcy.

Remain grounded and focussed and don’t get so caught up in the hype around your new business venture that you take your eye off the ball.

 

5. Retain a buffer

An essential element of smart business management is putting in place a financial plan for your business from the very beginning. This should include a buffer that you can call on when things are tight. Have at least 5-10% held in cash that you can access quickly.

 

6. Stay disciplined

When you’re trying to grow your business it’s easy to blur the lines between what relates to business and what relates to you. It’s important to remain disciplined and refrain from mixing your personal assets and business interests.