How to Prevent a Cash Flow Catastrophe


Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Thursday, August 24, 2017

Having a healthy cash flow is the foundation of any successful business, allowing you more freedom and flexibility, but how do you prevent a catastrophe?

Article 2 Minutes
How to Prevent a Cash Flow Catastrophe

Cash flow is integral to any business and can seriously affect decisions you make. For a small company just starting up, it can be difficult to know what to do and what not to do to keep a healthy cash flow.

Even if your company is experiencing a period of strong revenue, if you don't have your cash flow in check, you can end up missing payments and one thing can quickly lead to another.

Bad habits can eventually result in a cash flow catastrophe, which can impact every aspect of your business.

So what can you do to prevent this? Below are tips to promote healthy cash flow and keep your enterprise on the straight and narrow:

Track your cash flow

It sounds obvious, but many businesses don't keep an accurate record of the outgoings, income and revenue of their company. You don't need to buy expensive software, though this may be worth its initial upfront cost if it encourages you to regularly update it. However, a spreadsheet can be just as effective.

If possible, it's also a good idea to produce a forecast for the quarter ahead. This should predict any seasonal changes that may affect your cash flow, such as higher heating bills or periods of the year where clients are known to pay late. By doing so, you keep on top of payments and alert yourself to any outstanding or high-risk accounts.

This will give you the most reliable information and help you to prepare your business so that even in worst-case scenarios, your cash flow doesn't suffer to the point where it affects your company.

Build good relationships with lenders

In order to help your business grow as it needs to, it's likely that you'll need to get additional funding to allow you to take the next step. There are various ways of doing this as a company, and it's important that you look at the interest rate of any loan you take out against your business, and include this into any cash flow plans.

You can be more likely to get a favorable deal if you have accurate revenue forecasts, which can be the foundation of a great relationship between yourself and lenders. By doing this, you're also allowing yourself to see any problems that may be around the corner, enabling you to take preventative action and limit the damage caused to your company.

Constantly evaluate costs

A good part of having a sheet that you need to regularly update with your business accounts is that it makes you look at exactly where your money is going each month. This is an opportunity to evaluate what expenses you have as a business, and where savings can be made.

This will help to keep a healthy balance between the money you're spending and the income you're generating.

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