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Episode #11

Why Profitable Businesses Still Go Bankrupt

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Hey! I'm Jeri!

I'm a financial educator and speaker known for simplifying complex credit and funding strategies. I've helped thousands of individuals and small business owners get the credit they deserve.

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Summary

Can a profitable business actually go bankrupt? Absolutely.

One of the hardest lessons I've learned as an entrepreneur is that knowing how to make money doesn't automatically mean you know how to manage money.

You can have customers, growing sales, and a profitable business—and still find yourself wondering where all the money went.

In this episode, I'm sharing 5 mistakes that can put a profitable business in financial trouble.

I've made some of these mistakes myself, and they've completely changed the way I think about money, debt, growth, and what it actually means to build a financially healthy business.

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Transcript

[00:00:00] Welcome to the Smart Credit experience, the place where financial clarity, strategy and transformation begin. I'm your host, Jeri Toliver, CEO of Smart Credit Solutions and the creator of the Smart Credit method. Every week I break down the truth about credit, funding and building a financially abundant life and business. So if you're ready to learn what lenders actually look for, how to build a fundable business, and how to move forward with confidence and clarity, you're in the right place.

[00:00:30] I used to think that if my business was profitable, that I was doing good.

[00:00:37] You know, if money was coming in, we're making sales, the business is growing. You know, why am I still stressed out about money?

[00:00:46] Why did I have months where I could look at how much the business made and then look at the bank account and think, where the hell did my money go?

[00:00:56] And let me tell you, that is a very humbling experience because at some point, you have to stop blaming having a slow month or the unexpected bills or whatever else happened. And then you have to realize that making money isn't the problem.

[00:01:13] Managing it is. And I had to learn that the hard way.

[00:01:17] Because the truth is, some businesses don't go bankrupt because nobody wants what they're selling. A lot of people go bankrupt, bankrupt. And they're actually making money in business. They have customers, they're making sales, they may even be profitable. And then they go bankrupt because the business isn't.

[00:01:37] It just can't financially support the way it's being ran.

[00:01:41] And there are five mistakes that I want to talk to you about today because I have made some of these mistakes. And this is not from, you know, some business growth textbook or book that I've read. This is just from my personal experiences. And so if you've ever thought to yourself, like, why do profitable businesses still get into financial trouble? Well, we're definitely going to talk about that today.

[00:02:05] So the first way that this happens is a business owner treats the business account like their personal checking. Now, this is probably one of the easiest mistakes to make when you have a business.

[00:02:18] You know, money's coming in, you feel like you've made the money. And sure, technically you did, but you have to learn, I had to learn also that just because the money is sitting in your business bank account does not mean that it's available to spend.

[00:02:33] And so you've got to think about, well, what does my business need to grow? You know, you've got to spend money on marketing, you've got to spend money on payroll, you've got to spend money on supplies, equipment, Software, the list goes on. Give me a break. And I think this is especially difficult when you're transitioning from the employee mindset into the business ownership mindset because it requires a different kind of approach. You know, when you're employee, you get paid. That's your money. You could do whatever you want to do with it. Your employer, they have already handled the taxes and you know, all those other things before the check even hits your account, right? But with your business, it doesn't work like that. You get paid and then you pay the taxes. You know, you get paid right then and there. And then you have to worry about what the business needs. So when you're, when your money comes into your business, you have to decide what stays in the business before you decide what comes to you.

[00:03:41] And that changed the way I started looking at money in of itself. So instead of asking myself, what can I afford? I started asking myself, well, what does my business need to grow?

[00:03:52] And those are two different approaches and mindsets. And I can guarantee you that when you start treating your business like a business, when you stop treating your business money like your personal money, you give the business enough room to breathe and thrive.

[00:04:11] Because if every single time you make some money, you transfer it to your business, your personal bank account, so that you could take care of a bill or so that you can get, get from, you know, get from behind or to catch up on something, you'll find yourself on that hamster wheel forever.

[00:04:29] So if you think that, you know, right now you're in a paycheck to paycheck cycle, and if you think that you're going to be able to get into business and escape that, that's actually not how that works. You're going to find yourself instead in a invoice to invoice cycle. And it's the same exact cycle that you find yourself in as an employee.

[00:04:50] So more money isn't going to solve that problem. A better strategy and approach and mindset will. And so if you're, if you're one of those people that's doing that, you're transferring money from your check into your savings. And you got to stop doing that because that alone as well are is going to limit some of your funding opportunities in the future. Now, the second reason why profitable businesses go bankrupt is they grow too fast.

[00:05:16] Now this might seem a little counterintuitive. And most people are like, what? When they hear this sounds like a good problem to have, right? Well, the thing is this.

[00:05:25] When you have too many customers or too many too much Business, it can actually cost you something.

[00:05:35] And sometimes your business can create demand faster than you've built the capacity for. Now, many of us have seen this happen before in real time. Like, for instance, Popeyes. Everyone knows Popeyes, a chicken place, right? About, what, four or five years ago, around Covid, the spicy chicken sandwiches started going crazy, right? It's, for some reason, just started going viral. And everybody named Mama was going to Popeyes to get this spicy chicken sandwich. And then what ended up happening was they ran out.

[00:06:09] They didn't have any more spicy chicken sandwiches. And so what happens when you don't have the capacity for the demand is people get upset. You know, they. They. They get upset, they get angry. People start leaving bad reviews, they start complaining. And that's not really where you want to see your business.

[00:06:28] You want to see your business thrive.

[00:06:30] And so this is where I learned that getting the opportunity and being ready for the opportunity are two different things, right? Like a big contract sounds good to most business owners. Like, for instance, one of my clients, she got a $100,000 contract, a corporate contract, as a matter of fact.

[00:06:51] She was really excited about it. But the problem was she needed to service that contract.

[00:06:59] She needed more capacity in order to even make it happen. And so she needed more supplies, she needed more inventory, she needed more help in order to make it happen. And so, you know, this is actually one of the reasons why funding can actually be really valuable for most small business owners, because capital can help you bridge those gaps and can help a healthy business prepare for growth.

[00:07:25] But if you grow without the capacity to support it, more business can actually make your financial situation worse.

[00:07:34] Believe it or not, the third reason why profitable businesses go bankrupt is they don't have any reserves, they don't have any savings.

[00:07:43] And, you know, this one changed how I define a successful month.

[00:07:51] I used to look at how much we made, and now I'm much more interested in how much we kept, how much we were able to hold on to. Because you can have a really good month, one month, and spend every single dollar that you made, and then the next month or two is slow. And now you're scrambling around, transferring money from your checking to your savings, from your savings to your checking, robbing Peter to pay Paul.

[00:08:19] And that's really not the situation that you want to be in.

[00:08:22] I remember once when I first started my business, I had some clients out of Atlanta, no shade to Atlanta. It was six. Six of them. They were all friends. They came to us and they said, hey, we need some help with Repairing our credit.

[00:08:37] Well, cool. We took them on. We helped them out. A couple of them bought a home.

[00:08:42] One of them bought investment property. The other few bought a car and got some credit cards. They were all happy as far as we knew.

[00:08:50] And then a couple of months down the. Down the line, I get a notification from our merchant, our bank, that says that we got chargebacks and that our bank account was being shut down. Because, I mean, they thought that we were scamming people.

[00:09:06] They really thought that we were at our house scamming people. And so, you know, they filed chargebacks with their banks, saying that the. The payments that they made to us were fraudulent, all six of them. And here we are, we service these people, they file chargebacks saying that it's fraudulent. That shuts down our merchant account, which means we're not even able to take payments anymore for our business. And then my bank account got shut down because it was in the negative. A few. A few thousand dollars. And so, you know, $5,000 being withdrawn from our bank account wasn't something that I had planned to happen.

[00:09:41] And it took me 90 days to even get that sorted out. But in the meantime, I had reserves, I had credit, I had a line of credit. I had some cash. Like, I had a safety net that I could use to help me through that situation.

[00:09:58] And I started to really understand the value of letting cash sit in the business, right? Allowing it to be there just in case.

[00:10:09] And I understand that sometimes it can feel like the money isn't doing anything, but it is.

[00:10:15] It's giving you breathing room.

[00:10:17] It's giving you the ability to think a little clearer. It's giving you the ability to shop around for good opportunities.

[00:10:26] It's allowing you to make a decision without immediately thinking, how am I going to pay for this?

[00:10:31] And so reserves and having a savings that gives you options. And I always, always suggest that as a business owner and even as an individual, you need to have six months on hand, six months of operating costs. And so if it costs $3,000 to run your business, you need to have $18,000 sitting in your bank account, just in case.

[00:10:56] Because, you know, there is a really big difference between making the decision because it's the right move and making the decision because you're desperate and you need money by Friday and you got to get it by any means necessary. That's a problem.

[00:11:12] Making decisions through a lens of desperation is what leads good businesses into bankruptcy.

[00:11:19] The fourth way this happens is you take on too much debt.

[00:11:24] Now, I've seen this. I've actually seen this happen before. Now, you know, if you've listened to me for some time now, you know that I'm not afraid of debt. I encourage you not to be afraid of debt.

[00:11:36] I don't believe that debt is inherently bad. I've used credit. I've leveraged it. I've. I've accessed over 8,000, $800,000 from my business alone. I've built access to capital. But I have also learned something very important as well, that just because somebody is willing to lend you money doesn't mean that you're able to afford it.

[00:12:00] So, for instance, there is a funding option out here called merchant cash advances.

[00:12:07] And you will find this almost everywhere. You will get calls about it, you'll get emails about it, you know, telling you that you've got funding available and we can get you funded in 24 hours. And it all sounds good when they're offering it to you. But the problem with these type of options is that the, they frame it as a loan, and it's not a loan. It's like, it's an advance. It's like a payday loan for your business where they advance you money based on the cash flow of your business. And the problem with this kind of funding option is that it normally comes with daily or weekly payback terms.

[00:12:46] And that type of funding option can get a lot of business owners in trouble because their business is not able to court payment terms that aggressive. Right? Like if you're paying $700 a week back for some debts, that can get some people in a lot of trouble that aren't financially stable yet. And so, you know, you may think that if I just get one loan or if I get one advance, it's cool. But what happens when you start getting two or three? What happens when you start getting equipment financing and a line of credit and a loan and, you know, advances, like all different types of financing, it looks good when you look at it one at a time, but when you start looking at it as a whole, those payments add up.

[00:13:35] And so, you know, you realize that all of your money starts to go towards debt payments. And that's, that's a huge problem that you just don't want to find yourself in. You get overextended, and then you find yourselves in financial trouble.

[00:13:51] So, you know, you start taking one payment and then another payment, and then eventually you've committed so much of tomorrow's money that today's business doesn't even have any breathing room.

[00:14:07] That's why I don't really get Excited about lending approvals or opportunities just because somebody said yes, you know, I want to know, what are the terms of this money? What's the interest rate on this money? I, um, what is the money going to do for the business? If I'm going to borrow money, there needs to be a reason that makes the business stronger, you know, more resilient.

[00:14:33] So, you know, that's the difference between using debt as a tool and using it as like a financial lifeline.

[00:14:39] And if debt constantly has to rescue your business, there is a problem much deeper that you are going to have to solve as the founder, because you can't just rely on debt to help you get ahead.

[00:14:55] You can do it to serve to some extent, but it can't be the only way. Okay, it can help you support the business, but it shouldn't be the only way you're getting money into your business.

[00:15:06] So many people think that if they get funding for their business, it's going to solve all their problems. It's not. It's only going to expose problems faster. That's all it's really going to do. And so if you're poor at spending money, you're going to do the same thing when you get funding. If you're not good at prioritizing, you're going to do the same thing when you have money. If you're not good at delegating tasks to other people, or if you have poor leadership skills, that's going to show up. Even when you get funding for your business, that is not going to change.

[00:15:43] It's just going to accelerate that process and it's just going to make you go broke even quicker.

[00:15:48] So unless you have a purpose for the money, right, whether, if it's investing into yourself, investing into your education, hiring a consultant, getting a coach, taking the course, going to events like whatever you need to do to become a better leader, invest it. Invest it into yourself, Invest it into your business, because your business can only grow as fast as you do. That's it. And so if you find yourself taking on debt just because it's being offered to you, you need to think again.

[00:16:21] Because one payment sounds good. And then before you, before you know it, you look up and you got seven payments and it's eating up 50% of your income. That is a problem.

[00:16:31] A big problem.

[00:16:32] And then the last reason why profitable businesses go bankrupt is they don't know their numbers.

[00:16:39] This is the biggest mistake, without a doubt.

[00:16:42] For a long time, I thought knowing what my business made meant that I knew my numbers, but that's actually not the case.

[00:16:52] I knew a number, right? I knew one of the numbers, but I needed to know them all.

[00:16:58] Because, you know, being in business does mean that you need to be financially versed in some form or fashion.

[00:17:06] Not being financially educated as a business owner is one of the biggest traps that you're going to find yourself in. Because, you know, you can look at yourselves and you could think, I'm doing great.

[00:17:18] And then not even really knowing that the business itself is struggling.

[00:17:23] And you don't have to be an accountant to even understand what's happening in your business. You can hire people to do your bookkeeping, you can hire people to prepare your taxes. But as the owner of the business, you still need to have your thumb on the pulse.

[00:17:39] You still need to understand what those numbers mean and what those numbers are communicating to you, because nobody else is going to carry the responsibility for the business like you do.

[00:17:52] There's so many times where I ask people, how much money did your business make last month? They don't even know how. What's your profit and loss? They don't even know what's your profit? Don't even know.

[00:18:08] And so, you know, making money is not the same as building a healthy business.

[00:18:14] And this, without a doubt, was probably the biggest, biggest shift for me as an entrepreneur. At first, I just wanted to learn how to make more money. That's all I wanted to do. And then I learned that making more money doesn't solve all of your problems.

[00:18:30] Because if you don't know how to manage $10,000, right, making $20,000 or $30,000, it's just going to give you bigger financial problems. That's it. I remember when we had our very first $100,000 month.

[00:18:47] I was excited. I was like, hell, yeah, we did it.

[00:18:51] But that didn't last too long. That excitement did not last too long because I had payroll that I had to take care of. We had a what?

[00:19:00] We were spending, like $10,000 a month on marketing. Like, I had some expenses to even reach those kinds of numbers.

[00:19:09] And so, you know, you've got to fix the behavior. You've got to fix the behavior. You can keep growing the business, and you can still feel like you're constantly struggling, constantly starting over.

[00:19:21] And so don't focus on just making money.

[00:19:25] Build the habits to keep it. Build the habits to grow it. Because a business, it can handle growth without breaking.

[00:19:35] A business that can survive slow seasons. Awesome. A business that can use debt strategically without depending on it.

[00:19:47] Wonderful.

[00:19:48] That is what I consider a financially healthy business.

[00:19:53] Because getting funding and relying on debt is not going to solve your financial problems in your business.

[00:20:01] The only problem that it's going to solve is your lack of resources.

[00:20:05] But once you get those resources, you still got to do something with it.

[00:20:10] So, you know, that's how you get a fundable business.

[00:20:18] That's how you do it.

[00:20:20] Because if you don't have reserves or if your business can't handle slow seasons, you're not going to be able to even really get funding for your business, really.

[00:20:30] So, you know, now I intentionally didn't. I didn't get into, like, the technical stuff when it comes to revenue and profit and cash flow. We're actually going to get into that in next week's episode because I'm going to be bringing on a very special guest to have that conversation.

[00:20:48] And I think it's going to be a very important follow up to this episode, because if you've ever looked at your business and you thought, you know, I'm making money, why don't I have any, then next week's conversation is definitely going to be for you. But if today's episode made you realize that you need some help figuring out where your business stands and what may be keeping you from becoming fundable, that's where we can actually help you out. So what you can do is you can head over to smartcreditcoach.com help that's smartcreditcoach.com help and get matched with one of our Smart Credit certified consultants. They can actually help you look at where you are right now, you know where you're trying to go where, and what needs to happen to put you in a stronger position to get fundable. Again, that's smartcreditcoach.com help. Because we believe that access to funding and money, it's not the finish line. It's really a start, starting point. And we want to be able to help business owners become more financially educated so that they can build the wealth, they can have the freedom, and they can live a good life on their terms.

[00:21:58] So now you have to build a business that knows what to do with money once you actually get it. So thank you again for joining me for our episode of the Smart Credit Experience. My name is Jeri and I'll see you next time. It.