How to Avoid Small Business Bankruptcy [Video]

Sanjay Singhal, Canadian venture partner at 500 Startups, sits down with the FreshBooks Blog and offers candid advice about how to steer clear of small business bankruptcy.

As an entrepreneur and investor, Singhal has started several companies and invested in more than 20 startups. Most recently, he created Author’s Republic, a self-publishing audiobook portal.

Singhal is open about his past mistakes, including his personal experience with bankruptcy. Here, he shares the key steps he’s learned over the course of his career to avoid small business bankruptcy. Watch the video and read the complete transcription below!

I’ve gone bankrupt. It sucks. I’ve had successful companies; I’ve had failed companies. A total of five companies. Here are a few of the things that I’ve learned along the way.

Step 1: Only Spend Money You Have

Small businesses hire too many people. It’s really important to match your staffing to your revenue.

A venture capitalist’s, a vendor’s or a client’s promise that “we’re about to send you cash”—none of that’s money. The fact that the word money is in it doesn’t mean it’s money. A line of credit is actually cash that you have because you can use a card. You can go to the bank and actually draw funds against it. Cash is money. So, something that you can actually see in a bank account, something that you can see in a stack on your desk—these are things that you can spend.

Step 2: Hire Superstars

Small businesses hire too many people. It’s really important to match your staffing to your revenue. Be ruthless about payroll because superstars are worth five times what a regular employee is worth. So, the best way to make sure you get the best employees is feel free to go ahead and hire more employees—put them on probation. If they don’t work out, fire them. Remember that you’re keeping that person from another job where they’re going to be happier, where they’re going to have a chance to be a superstar. They’re just not the right person for your company.

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Step 3: Manage Cash Flow Strategically

Let me give you a little lesson in cash management. Imagine your business’s cash flow timeline over the course of one month. What’s important about the zero-dollar cash line is that you don’t go past it. So, if at the beginning of the month, you get a bunch of client money in. A little bit later, you pay all your staff. Then you have an invoice for a bunch of supplies. So, you pay the invoice, well look what just happened: you just went past the zero line that I just told you not to go past.

Right after it, you get some more money from your clients towards the end of the month. And look at that—that’s profit. That’s what you’re in for. Except look what just happened: Back here you went bankrupt. What you can do is offset almost any bill against income that you have. So, instead of paying it on the 20th of the month, pay it on the 28th of the month when you expect that other cash flow to come in. That way, instead of the valley of death, you end up going straight from positive cash to positive cash. And bam, you’ve got your profitable business without going into bankruptcy zone.

Step 4: Understand How to Protect Yourself

Make sure that you run it as an independent corporation, not under your own name. There are a bunch of reasons for this. One of them, the most obvious one, is shielding yourself from lawsuits. Your corporation is a separate entity so if it does something wrong, people can come after the company but not after you personally.

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