2. Insufficient initial funding
Don't rely solely on credit to fund your business. If you start in a deficit, climbing out of debt and becoming cash positive will be much harder. It can also be challenging to break the habit of throwing capital investments on credit in an attempt to start making money.
Explore all of your options for initial funding. Ensure you have enough budget to start your business on the right foot.
3. Difficult market conditions
Economic recessions or depressions can negatively affect businesses, especially those relying heavily on consumer spending. Unfortunately, there's not much anyone can do about a poor economic climate but try to budget for the ebbs and flows of the market so you have breathing room if times get tough.
An emergency account with money set aside for unexpected situations will at least give you some cash to survive on if things take a downturn.
4. Poor financial management
Finances can get complicated, so you must ensure you're on top. Failing to keep accurate financial records, not managing expenses effectively, and not correctly forecasting future revenues and costs are all issues that could hurt you financially.
Work with an accountant, bookkeeper, or advisor if you have difficulty managing your finances. They can help you set a plan and show you how to ensure your money is best used.
5. Lack of market research
If you can't compete with your rivals, your construction business may struggle to generate enough revenue to stay afloat. This problem typically comes back to a lack of market research.
Entrepreneur jumps into a market they're passionate about, only to discover that somebody else is already offering the same thing – and they've already got the market cornered. Or maybe there's no need for that particular product or service.
Market research before entering the business and offering a new product or service. The results will tell you whether there's a need for what you're offering.
6. Legal issues
Lawsuits, fines, and penalties can be costly for businesses, draining their financial resources. The best way to avoid this is to ensure you're familiar with the rules and regulations you must follow or get help from a professional advisor when necessary. An ounce of prevention is worth a pound of cure.
Construction Company Failure is Always Preceded by Bad Bookkeeping
The construction company owner who buys QuickBooks and hires a regular bookkeeper to "put stuff into QuickBooks" and then ignores all of the financial and job costing reports generated from their QuickBooks file drives their construction company into economic doom.
Too often, contractors have led down the primrose path into bankruptcy and business failure by relying on inaccurate, false, misleading financial and job costing reports from their QuickBooks file.
Part of the blame rests on Intuit, the maker of QuickBooks because their marketing strategy implies that anyone, regardless of their understanding of accounting principles, can use QuickBooks, and if you are a contractor, all you need is QuickBooks for Contractors. It sets up contractors for failure by playing to their self-image of strong people who are rough and tumble and can do anything. In too many cases, these contractors end up feeling inadequate and experience huge disappointments feeling like they are the only people on earth who cannot figure out how to use QuickBooks.
Most of these contractors give up trying to make QuickBooks do what they want and lower their expectations to just knowing how much money is in the checkbook, Key Performance Indicator #1, and ignoring the other four Key Performance Indicators. Ultimately, it is like driving a car in the pitch-black darkness, on the freeway, with a tiny flashlight at 60 MPH, and being shocked and dismayed when it crashes, rolls in the ditch, and burns.
How to avoid bankruptcy
While the reasons construction businesses end up going bankrupt may seem numerous, there are some specific things you can do to make sure it doesn't happen to you, such as:
Final thoughts
A business might end up in bankruptcy for many reasons, but a bit of planning goes a long way. Do your research, be honest when you need help, and work with a financial professional to help you stay profitable. Contact us to discuss further how you can protect your construction business and learn how we can help.
No construction company goes bankrupt that had useful, accurate Financial Statements and Job Costing Reports that they understood and paid attention to because they would have seen bankruptcy coming well enough ahead of time to avoid it.
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