A recent report from Fundera1 says that 20 percent of small businesses fail in their first year, while 50 percent fail after five years and 30 percent fail in their 10th year. While reasons for failure can vary, financial woes are a quick path to a business's demise. Following are some expenses you should be prepared to deal with as you navigate your company on its way to success.

1. Overspending early on

A lot of hungry entrepreneurs make the mistake of loading up on things they don't need or overspending on inventory using unrealistic projections for sales. This is a good way to run up your debt and put a serious crimp in your cash flow. It's important to have what you need and to plan ahead, but not at the expense of bankrupting your business early on.   

2. Debt

This is directly connected to the first item. If you rack up too much debt, you're going to have a hard time paying it off, and ultimately, you may find yourself with no other option than bankruptcy. It has happened to far too many entrepreneurs eager to take on the business world without realizing how dire their financial situation can quickly become. Make your payments on time and pay down what you owe on any loans and credit cards you have in a timely fashion to prevent becoming overburdened.

3. Taxes

While you certainly know you have taxes to pay on an ongoing basis, if you don't stay on top of your estimated quarterly payments and pay what you owe as taxes come due, you may find yourself in a world of financial trouble. Pay the government before you pay suppliers, since their penalties will undoubtedly be harsher. The government will get what it is owed from you one way or another, so it's best to stay ahead of the game and keep yourself afloat before the waters get too choppy.

4. Legal expenses

There are two types of legal expenses: the expected and the unexpected. The former can be burdensome, but it comes with the territory. Sometimes you need legal counsel to help you make sure you're doing the right things when it comes to incorporation, regulations, etc. Other times, an unexpected legal matter might blindside you.

5. Unexpected loan expenses

As you apply for a small business loan or line of credit, be sure you understand all of the terms that come along with it. Pay attention to the fine print, and don't be afraid to ask questions before signing on the dotted line. You must be prepared for any expenses, such as interest, before you move forward. Be sure you have a solid business plan that will enable you to pay back what you owe on a timely basis to help avoid late fees.

6. Shrinkage

Shrinkage refers to loss in inventory. This can happen for a variety of reasons, including errors, theft, damage, etc. It happens, and you should always consider it, but you should also find ways to keep it from occurring.

"To prevent shrinkage, entrepreneurs must first determine where their products are the most vulnerable to shrinkage," says Brendan Egan, Founder & CEO of Simple SEO Group.2 "Shrinkage can occur because of shoplifting, employee theft and errors. Shoplifting is by far the most common cause, so you may want to start here. For example, a retail business owner will need to consider installing a security system, hiring enough people to watch over customers, and training employees to look for signs that someone is shoplifting. Preparing in this manner can help entrepreneurs fight shrinkage and protect their finances. Ecommerce businesses should ensure they have a proper auditing system in place to prevent errors and lost product."

6. Disaster

Unfortunately, this one may be out of your control, but that doesn't mean you can't be prepared. Disaster preparedness is crucial to ensuring that operations can continue in times of crisis and minimize financial loss. This applies to both natural disasters and human-made disasters like cybercrime or even incompetence. Have a plan in place for any realistic scenario, and make sure all staff is on the same page about how to proceed. There is plenty of guidance out there about how to put together a plan if you take the time to research.  Make sure to have disaster insurance.  It could save you a bundle in the long run. It may even save your business.

7. The Little Things

Small expenses can add up to major losses over time, whether it’s office supplies, breakroom coffee, or toner for the copy machine. Make sure you’re getting the best price on these items and not buying more than you need. If you have a petty cash fund, don’t let it turn into a slush fund for employees. If they know you’re tracking cash outlays, they’ll be less likely to take advantage.

Keeping a watchful eye on all expenses, whether large or small, can help you avoid financial problems.

1. https://www.fundera.com/blog/what-percentage-of-small-businesses-fail

2. https://www.entrepreneur.com/article/313461

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC