Launching and running a business is as exhilarating as it is overwhelming. Initial expenses and credit-heavy business decisions can create financial complications that force small businesses to file for bankruptcy. It is no surprise then that 29% of business fail due to a financial crisis. While bankruptcy filing can give the business a chance to start over, learning from earlier mistakes, the damage to the reputation and credit history can be difficult to overcome.
So, as in other instances, prevention is better than cure. Avoiding bankruptcy should be the aim. But remember that debt is not the only cause of financial problems. Poor financial management causes cash-flow problems that could well be impossible to recover from. Maintaining positive cash flow requires businesses to make cash-flow management an essential part of their operational strategy. Here’s how you can do it.
1. Avoid Accumulating Debt
Stay vigilant of your outstanding debts and prioritize paying back the high-interest ones. While planning your expenses, ensure that secured loans, space rentals, payroll taxes, and utility bills are handled first. Non-essential costs, such as marketing and business expansion, can be postponed till you have enough cash in hand.
Do not take a loan for a non-essential activity hoping that its ROI will help you overcome an existing cash crunch. Most importantly, avoid piling up lifestyle expenses at the cost of the financial health of your business. Any cash outflow to places that do not add value to the business is a giant red flag.
2. Prepare for Emergencies
Unforeseen financial disasters, seasonal declines in profits, and failure to predict cash flow shortages can land you in a debt trap. Have the plan to overcome financial distress. Saving up for financial emergencies and ensuring that predictable expenses do not eat into this fund can help you remain financially prepared for anything the business might face.
3. Use the Envelope Method
Reportedly, 43% firms claim that the biggest financial challenge in running a business is bearing operating costs. Using cash and only cash to meet these expenses is going to keep you “aware” consciously about where your money is going. This helps in maintaining a budget, avoiding any bounced checks or resorting to overdrafts.
Use a Zero-Budget base strategy. This means starting each month with a net zero balance and maintaining the monthly expenses within your monthly income. Account for fixed and variable monthly costs, salaries, inventory management, etc. Adequate tech usage can help you forecast cash flows, invoice promptly, account for receivable collections, and create a monthly expense envelope that is within the monthly income limits.
4. Wisely Choose to Buy or Lease
Before spending on any major equipment, conduct a financial analysis of whether you should buy or lease it. Factors such as the longevity of the item, its ROI, your financial capacity, and the impact on the cash flow should be considered. A watchful selling routine is an excellent complement to a wise spending habit. Selling all unneeded or old inventory before buying the latest tech adds cash to your kitty. Maintaining the inventory effectively, according to the supply-demand ratio and shelf life, reduces costs.
5. Invest in Professional Help
Finances are not everyone’s cup of tea. Plus, you need all your free time for business development, quality assurance, and client acquisition, rather than working out cash flow issues. So, it is wise to enlist professional help to save time and energy. It will also ease the process of maintaining positive cash flow. Onboarding a debt consolidation specialist or a financial advisor may save you a lot of pain in the long run.
The ongoing ability to generate cash is a measure of the strength, profitability, and long-term outlook of your business. So, invest in cash flow management.