How can my small business avoid running out of cash and going bankrupt?

In the years since the recession, things have gotten better on the business front. Still, pitfalls abound, especially for businesses that don’t have the name recognition or deep pockets as their larger rivals. Those challenges can bite at a moment’s notice, taking down even businesses that have been a staple of the industry for decades. Below are four danger spots to watch.

Manage Costs Before They Manage You

Poor money management is the number one reason businesses fold. Buildings need repairs and paint. The weather can be worse than planned. In cold climates, spring cleaning can be an expense. Owners need to figure those potential costs and plan for them well ahead of the due dates. But even a needed paint job or repair can be tough for owners who do not have a loan or a reserve. Those that put it off risk hurting curb appeal. Avoiding them can invite local fines for violating building ordinances.

A good business owner spreads these costs out over the whole year. Some owners manage them by saving each month for 12 months. Others fold all the costs into a draft budget for the year, then save toward that. Choose one way or another - but manage costs before they manage you. Even a “lean” budget might not be lean enough, if a business owner does not start putting something aside for a rainy day.

Next is to check how much a business is spending just to open the shop each day. Are rent, materials and labor giving value? Lots of owners let credit lines, supplier contracts, and the price of credit drift away from market prices as the economy shifts. Those changes might happen slowly - one by one, month after month, year after year. They just nibble at income, silently. Is the shop in a primo location? What are rents in other spots nearby? A business owner should talk to renters of similar properties, to see what they pay. Maybe you do not need that prime storefront on a busy strip.

Review your costs every month or quarter. See if you’re paying more or less for materials than last year. Look at your vendors’ contracts. Are staff people helping margins, or just showing up? Always shop the rates or get new bids. Treat vendor contracts like a renewal lease. Young businesses must compromise now and upgrade later as margins improve.

Business Data

A third focus should be on a problem many people don’t worry about - keeping their business data safe. Breaches are not rare anymore. Still, small shops think they’re safer just for being small. Big bucks are hard to grab, so petty crooks now go after small firms for small pots of cash. Shops in small towns must protect their reputations in a small social bubble.

Find stronger passwords for any device that connects to business data. Add a second layer to log-ins. Even small shops must use mobile security apps that wipe a phone or laptop remotely - if it falls into the wrong hands, or staff lose it. Remote staff should also use a virtual private network (VPN) to log in to business systems. If your data is especially valuable, hire a reputable firm to try to break your system. Penetration testing means using software or using an outside pro to spot holes that cyber crooks might try to exploit to get your data.

A Sudden Surge in Demand

A fourth danger is a sudden surge in demand. Many people overlook it, but it is a surprisingly common cause of failures. A viral video, a Facebook post, or some other lucky exposure can suddenly give the world notice of your product overnight, with sales exploding before your eyes. If it happens, a small firm might rush to buy lots of new inventory. A few months later, if the buzz fades, the firm still has all those new obligations, and less revenue to meet them.

So, write a what-if plan with spending limits on how much to keep in inventory. Then sign off on it and stick to it, like an investor in your business would expect you to. Prepare in advance, rather than respond to pressure in the heat of the moment. Excitement and dreams sometimes let owners overreach. That matters, because only about half of small businesses last five years, and most run on tight budgets. Stay alert, stay informed, because what you know today can help you avoid what you might not know - later.