Being financially prepared means to have the adequate amount of cashflow to ensure survival during hard times; although the amount may vary from person to person, the finish line is the same with it being financial security and stability.
In the business world, financial disasters could mean natural disasters, lawsuits, medical emergencies etc. Any of these could instantly disrupt your cashflow. To be aware of these possibilities is the first step in handling the issue as a whole.
You should always expect the best and plan for the worst, and since you’re aware of what could happen, here’s a few questions to ask yourself if you’re looking to be financially prepared for a business disaster.
1) Are you in debt?
If you have debt collectors breathing down your neck constantly, that will ultimately be the thing that bursts your financially secured bubble. Paying off debt should always be the first step to creating financial stability; as a guideline, debt payments should be larger than the sums going into the account. Once debt is finally paid off, then you should use that freed up money and put it towards an emergency fund of sorts.
2) Do you have a budget?
It’s only human to always want more even when you have enough. However, if you don’t know much much money you have coming in and going out each month, you certainly won’t know how much you would need for a business emergency as well. A budget isn’t a financial advisor but it is a useful tool that can help you decide if you’re happy with where your money is going and where you stand financially.
3) Do you manage cashflows?
A solid cash management plan is vital to ensuring your business remains operationally liquid whether sales are fluctuating or remain stable. Cash reserves and a good accounts receivable collection policy are vital in the plan. Cash reserves build up over time by depositing excess money in a bank or money market account during months when sales are high. This not only reduces time between selling merchandise or services on credit and receiving money, but also reduces time and expenses involved in past-due collections procedures.
4) Are you using credit wisely?
New SME owner and freshies in the business world tend to have more touble with credits. While cash management policies can reduce the need to borrow money to fund a working capital account, financing will still be an necessity at times. When that happens, it’s important to stay away from high-interest credit cards and loans from finance companies. Try to work out an extended payment agreement with vendors and suppliers instead or speak with a banker with whom you’ve developed a relationship.
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