Every entrepreneur should strive to run her business venture without depending on borrowed money because a debt-free business not only averts stressful situations and eliminates risks significantly but staying out of debt also confers other benefits and advantages such as ample financial freedom and flexibility as well as considerably lower operational costs. So, now the question is, how can the SME owner manage her business enterprise without depending on borrowings?
One of the ways is through diligent and effective cash flow management, which involves monitoring cash inflows and outflows. Here, the first and foremost requirement is to ensure that the cash in hand and at the bank as well as inflows of cash are always higher than the cash outflows. It means, the entrepreneur should set up her business unit only with her own money and savings, without depending on borrowed capital or bank loans.
Secondly, the business owner should always have sufficient reserves to cover all the capital needs, operational costs and unplanned expenses. To ensure that all the clients pay on time, she should design very effective credit and account receivable policies as well as efficient collection practices. Simultaneously, she should avert outflows by eliminating wasteful expenses and operational inefficiencies.
If the business owner maintains a good credit standing, the need to make advance payments for purchases can be avoided. And if she can manage to get lower prices and better credit terms to settle the outstanding bills of the vendors and suppliers, then cash outflows can be delayed until the customers pay up.
The next thing to focus on is the budgeting process which will empower her to decide where and when she wants to spend the money in her business. It will also enable her to know when the outstanding bills are due for payment, and when will she receive payments from customers. This knowledge, coupled with efficient and appropriate measures aimed at averting cash flow problems, will allow an SME owner to run a debt-free business.