Featured image by Andrea Piacquadio via Pexels
Business owners are always so focused on profits that they hardly think about preparing for financial emergencies. And while some of the financial issues listed in this article might be rare, they can affect a business so severely that it goes bankrupt.
RELATED ARTICLE: BUSINESS RESILIENCE TIPS FOR ENTREPRENEURS
As an owner, you are in charge of your business and your employees since you’re the one giving them their income. So, if your business goes under, you’re not the only one who will suffer. We’re not saying to be paranoid, of course. What we’re saying is that you should be prepared. An emergency fund is an excellent way to start preparing for the worst.
It’s also worth noting that some of these financial emergencies are beyond your control, making it necessary to have an emergency fund. But what are these worst-case scenarios, and why, as business owners, should we care about them?
Negative Cash Flow Could Be a Sign of a Chronic Financial Emergency
A negative cash flow is self-explanatory. Your outgoing expenses are becoming more significant than the profit you’re pulling into your company. You might be thinking about this in the short term. But what we mean when we say negative cash flow is that when your sales alone can’t cover the difference. In this type of financial emergency, you have to ask for the help of your investors and find other forms of financing.
Of course, a negative cash flow is quite common for new businesses, but when it comes to the long term, there’s no way you could sustain yourself in this state. So what does it mean when your business has a negative cash flow? Most of the time, it means that it’s not pulling in profit and the business is losing money. But, sometimes, it can also mean that your cash flow has poor timing when reflected with your expenses and income.
You can still make a profit even when your business is experiencing the financial emergency of a negative cash flow. For example, your client paid late so that you don’t crash on hand to produce a product.
With all that said, avoiding having a negative cash flow is essential. Sure, this might be fixed with traditional financing like business loans or even personal financing like taking out a $300 dollar loan from CreditNinja, but preventing it from happening is more important.
Are You Losing Clients?
Sometimes, the loss of a client can be a financial emergency that’s tricky to manage. So many questions will go through your mind, like, “What did I do wrong?” or “Did I say something that upset them?” Loss of clients can be destabilizing for your business. You’ll lose one of your primary sources of income and the connection that goes with it. So what causes this?
When a client tells you that they don’t want to continue their contract with you anymore, the first thing that you should do is to ask them what made them go with this decision. Is it for economic reasons? Do your competitors offer better products or services? Or did we not meet their expectations?
If you can’t do anything about it, there’s nothing else to say. But if it’s something that you can work on, you had better take action. You can take feedback and use that to better your business. Doing so could help you avoid similar financial emergencies in the future.
A business always needs to work on client retention to be one of the best in the industry. It’s because clients tend to float toward those companies regarded as one of the best. And, of course, with trust and loyalty, the client will have smooth interactions with your business, which turns into praise and recommendation.
Therefore, a business needs to retain its clients. Because when you lose clients, your business will lose its source of income, but it can also cause a bad image for your business. Your potential clients will wonder why client turnover is high in your company, causing them to be wary and avoid dealing with you as much as possible.
Failed Investments Can Be a Financial Emergency
Having an investment failure comes with a considerable cost to your company. No matter how many precautions and research you take, not every investment you make will go in your favor. So, you need to know which one of your investments is a dud.
Having an exit strategy whenever something goes wrong with an investment is essential. If you don’t get out of that investment fast enough, your business finances will take a considerable toll.
You have to understand that it is a financial emergency when an investment is not bringing in any money. It’s a no-brainer because we make investments to profit, and if it’s not yielding any, it’s failing. So with that said, before you go and make any investments, you have to research everything about it first and if any signs of decline are showing, pull out.
RELATED ARTICLE: THE ULTIMATE BENEFITS OF HAVING ACCURATE ACCOUNTING REPORTS
Prepare for Financial Emergencies Well in Advance
These financial emergencies come at a considerable cost or can even bankrupt your business. However, at some point or another, a business will undergo a financial crisis, and it’s up to you to be prepared well in advance. Remember, one of the most critical aspects of your business is its finances, and if that goes under, the business will crumble.
Keep your business going strong through tough times. Find ideas and inspiration by browsing our blog.