Maintaining a positive cash flow is one of the most important parts of running a business.
Cash flow can become a big problem if you’re spending more than you’re earning. You might hide the fact for a while, but it will ultimately catch up with you. When that time arrives, you can find yourself in all sorts of financial trouble and tarnish your good name.
Once a creditor gets the slightest whiff that you might be heading towards financial strife, it will start demanding full repayments. And if you aren’t honest with your creditor, it will report your situation to a credit agency. From there, things start to go downhill.
If you fear you may be in this position, follow these tips to learn ways to save yourself before you’re in too much debt.
None of this is exaggeration, it’s happening every day. A business owner somewhere has run out of options – all future credit is stopped. No more loans and no mortgage acceptance for the home of their dreams. Why? Because they let things get out of hand and cash flow dried up.
1. Don’t accept late payments without penalty
There are many ways your cash flow can dry up, but it can be especially problematic if you’ve been too lenient with payments from your customers.
Some debtors like to hang onto their money for as long as they can. If you have many debtors doing this, your cash flow can dry up. If this is the case, you can do something about it by sending timely invoices and clearly enforcing fees for late payments.
2. Keep spending in check
If you’ve been spending money on unnecessary things, you can find yourself up against a financial brick wall. Some people put off paying credit card bills until it becomes too late. The interest becomes extremely high, and the lender deactivates the card while the bill still needs to be paid.
When this happens, you’ll have no choice left but to knuckle down and begin the long, hard road of paying your creditors back. It might change day-to-day luxuries considerably, but you’ll be left with no option other than declaring yourself bankrupt — and that has its own long-term consequences.
3. A positive cash flow is simple — don’t complicate it
Being owed money doesn’t mean you have cash in hand. It isn’t considered cash until its yours alone and doesn’t have to be paid back. If you have money owed to you, it isn’t cash you can spend.
You can even take it a step further if you are disciplined enough and only regard cash as being spendable money after you have paid the rent or mortgage, invoices and all other bills. The remaining money is considered available to spend.
4. Maintain a budget to monitor cash flow
To know what your present cash flow is, you’ll have to draw up a budget. One side will have all the bills you need to pay. The other will have your business’s earnings. To maintain a positive cash flow, you must always have excess in your earnings column. Failure to do something about it now will make it harder when you start missing payments and your credit rating becomes affected.
When you draw up a budget to see exactly where you stand as far as cash flow is concerned and take action to do something about it, even if you get a negative result, you’re exercising effective cash management. This way, you will always know exactly where you stand. Whatever you do, don’t borrow money from any source unless you are certain you’ll always keep a positive cash flow.