As entrepreneurs, we all strive to build businesses that create value in the ecosystem, make money and help stakeholders establish a profitable venture. That does not always happen.

Businesses fail due to various reasons and in the worst cases can also shut down. How do you prepare yourself for such an eventuality? Here are a few things to look into.

Closures for reasons beyond your control

There are many reasons that are outside your control as an entrepreneur. There could be serious damage to your property or equipment. Even if the assets can be salvaged, this takes time and could thus interrupt cash flow.

If you fear something like this happening to your own business, the first thing you should consider buying is a Business Owners’ Policy. This is sort of an umbrella policy that covers everything from property damage to loss of income, injury and medical expenses. Such policies gives your business a realistic chance of survival even in the most unlikely of scenarios.

Closures for reasons in your control

A majority of businesses close within the first few years of operation due to two reasons – financial mismanagement and poor administration. Most first time entrepreneurs only focus on sales and revenue without focusing on cash flow or profitability. Healthy cash flow ensures short term success of your business while profitability is absolutely critical for long term viability.

If you suspect that your business is going south because of financial issues, it is important to take a critical look at your expense records and understand where your money is going. An expense management software should help you with this. Also look at your credit and invoice policies to make sure that you get paid from your clients before you pay your suppliers. Not following this can contribute to serious cash flow issues for your business.

Poor administration is another popular reason for businesses to fail. Employees help scale your business up and thus increase your revenues. At the same time, they increase your overheads and thus raise the bar on your Minimum Viable Income. As a rule of thumb, you should increase hiring for profit centers in your business (sales and marketing, for instance) and reduce hiring on cost centers (admin, human resources, etc.). This way, you can make sure that your employees are always a cash positive investment for your business. Look at outsourcing the other aspects of your business to a third party contractor who can bring expenses down because of scale.

Planning the next steps

Once you have worked out the reasons for your failure, the next step forward is to plan the next steps. Fixing your financial or administrative issues is the first step. If you are facing temporary credit challenges, you may also consider changing your pricing model. For instance, if you notice that your customers repeat their orders every two months, you could consider offering a subscription plan to make your supply chain more predictable. You may also consider offering a discounted annual pricing plan. This eases up your cash flow significantly and can help you turn your business around.

If none of this works, you may also consider pivoting your business model. There is perhaps a reason why customers are not interested in your current offering. Conduct an online survey among your newsletter contacts to get insights into your buyer profile that can then be used to design a suitable pivot for your business.

Have you had a business turn south? What steps did you take to correct its course? Share your thoughts in the comments.