Written by: Ethel Lair
Small businesses live and die by their operating cash flow, according to statistics from ForwardAI. Maintaining a stable cash flow is hard – many businesses have narrow profit margins, late-paying customers, high overheads, low cash reserves, and, consequently, cash flow crunches.
Needless to say, when there’s no cash, operations may stall and may cause a business to shut shop – even in an otherwise strong market, with a solid business model. And when times are tough – think the recent Covid-19 crisis and the related economic downturn – then bankruptcy becomes a near certainty.
If you’re a small business owner or manager, having a safety net for your small business is essential. It’ll see you through the hardest of times and is key to your long-term survival. Below, Small Small Business offers this mini-guide on creating a safety net for your small business:
Build up a cash reserve
Your best safety net is a cash flow reserve. This should be enough to cover six months of operational expenses. Having an emergency or rainy day fund on top may also be a good idea. You can build up cash reserves by setting a monthly savings target, creating a budget, and reigning in expenses.
Get a line of credit
Most businesses can qualify for a line of credit aka unsecured loans from banks or private lenders. This is typically for amounts ranging from $10,000 to $100,000, which is a significant influx of cash when you need it. However, bear in mind that interest rates can be quite high.
Being insured is smart, especially if you anticipate a certain kind of risk. For instance, commercial auto insurance is essential if you own delivery trucks or similar. Other key insurance types to look into include keyman insurance, professional liability insurance, data breach insurance, and business income insurance.
Create a minimum-viability business model
How would you run your business if revenues were cut in half? Making a crisis-ready backup business model would help you answer that question. This would help you navigate crises by moving into survival mode. Some examples of strategies to incorporate into this model would be reducing the scale of operations, letting employees go, getting rid of non-priority processes, and only having a minimum-viability product (MVP).
Create alternative income streams
Don’t put all your eggs in one basket – it’s always a good idea to come up with alternative income streams for your business. For instance, you could diversify your product or service, or attempt to move into a brand-new market. Furthermore, you can always have a side income from, say, personal
Keep your business and financial records organized
Knowledge is power – having a bird’s eye view of your finances lets you keep tabs on the health of your business, identify trends, and spot potential problems. You can quickly and conveniently organize your business and financial records digitally using PDF tools, For instance, a PDF splitter tool will let you quickly separate a single PDF into multiple separate PDF pages. Once you save the file, you can rename, download, and share the new PDFs with others.
Protect your personal finances
As a small business owner, your personal finances could impact your business. For instance, lenders and suppliers often look at your personal credit score before lending you money. Make sure you keep a good financial situation, including having a budget, cash reserves, and insurance. Having coverage in case home systems or appliances break down via a home warranty might be worthwhile. This is an annually renewable contract that covers breakdowns of heating, cooling, electrical, and plumbing systems, along with covering appliance repairs. You can streamline your search for appropriate home warranties by looking them up online.
Choose a business-friendly structure
Having a business-friendly structure mitigates a great deal of the risk involved in running a business. For instance, if you form an LLC, your personal finances are separated from your business ones, protecting the former against lawsuits. The other benefits are tax advantages, more flexibility, and less paperwork. In order to form an LLC, you can hire a lawyer or use a formation service, which is considerably less expensive. Before choosing a formation service, read reviews to determine the best one available.
Having a safety net will give you a cushion against economic downturns, absentee employees, and other business challenges. Furthermore, it can also offer you – the business owner – peace of mind. Knowing you’re prepared and have enough on hand to keep going can take away from the many stresses of running a business.
About the author:
Ethel Lair understands that it’s easy to live the life of your dreams when you know what you want to leave behind for future generations. She created legacybasedliving.com to help her site visitors create financial plans that allow them to leave a legacy of support and love for their families and communities.