Having the funds coming in to keep your business going is essential to the doors staying open. Cash flow is the phrase used to indicate money coming in and out month after month. When you seem to be paying a lot more out than what you collect, that is considered negative cash flow. Staying on the positive side means you need to be getting paid by customers regularly.

Do you know how to manage and understand how money comes in and goes out? Not doing so may have financially catastrophic consequences for your business.

Spending More Than You Make

One of the worst habits business owners get in is spending more than they should. Your company has bills that need to get paid to continue operating, but sinking more money into something that is already showing negative results may yield even more trouble. For example, trying to land new clients may require some money to invest in products, marketing campaigns and other perks. However, overspending to draw people may backfire if they don’t ante up.

Allowing Customers To Pay Over Time

You want to make your business transactions run smoothly, and that may mean allowing customers extra time to pay. While this strategy works for some businesses who already experience positive cash flow, it hurts those that are not soaking up the cash. Giving a customer 60 days to pay something that could easily be collected in 30 may leave you in a bind when too many the full term to pay or don’t pay at all. You may go through months where little to no money is coming in, leaving you in a financial bind and forced to take on more debt.

Growing Too Quickly

It is every small business owner’s dream to go from one location to four or to expand the workforce from three to 33. All are indicators of growth and stability in your company. However, growing too quickly may cause undue stress on your cash flow. If you don’t have the money to maintain the additional locations or to pay the extra payroll, not only will your expanded operation fold, but your central location may too.

Whenever evaluating your business strategy when it comes to expansion, make sure you have a trailing history of positive cash flow. That proven success should be lengthier than a month or two – it should be years.

Understanding how cash flow works can help you avoid falling into these common pitfalls. While it is exciting to grow and see your business thrive with new clients, it is equally as devastating when you overextend it, and it is forced to fold.