A favorite adage is “you need to spend money to make money.”
This can be a motivating philosophy to follow, especially in the early days of a business when it seems like the costs outweigh the revenue. But an investment in yourself in expectation of future growth can be a smart idea.
But later on, being generous with your spending might be riskier especially if your cash flow is unstable.
Cash flow is the general principle of how much money you have coming in vs. how much money you have going out. If your costs outweigh your revenue, it’s called negative cash flow. This type of situation is common in businesses where the business still has to pay certain fixed expenses such as payroll, rent, utilities or loans, regardless of sales or promised money. Too many of these “we have money coming but not presently” situations can eventually doom a business, which is why steps should be taken to prevent them.
Try these situations to make sure you maintain positive cash flow.
Have money reserved
Projecting which months will be busy and which months will be lean based on historical data can help anticipate how much to put aside just in case. This will avoid being surprised, scrambling or looking for fixed costs to put off.
Beware of interest
Delaying fixed costs to avoid a negative cash flow situation doesn’t make them go away. It just moves them into the future, often with penalties. Delaying payment also can require paying more money in interest, further adding to your debt load.
While cash-based businesses require better money management and accounting skills, it can help keep your business afloat while you await larger payments.
Consider accounting software
Watching your cash flow carefully can help you plan well for what’s coming ahead. It also can provide additional tools to your accounting team.
A line of credit or loan which you can draw from can be helpful, especially if you pay it off regularly when money starts returning.
For more strategies and financing options, contact Vankeith Commercial Capital.