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Cash flow management essential for small enterprises
![Cash flow management essential for small enterprises](https://biz-file.com/c/1403/187113.jpg)
What most entrepreneurs don't realise, says Ravi Govender, head of Small Enterprises at Standard Bank, is that poor cash flow management can begin with the habits, mindsets and behaviour of the business owners themselves.
Personal weaknesses
"Often, small business owners bring their personal weaknesses, like bad money management, into their businesses. Combine this with a reluctance to realise that there are times when you have no option but to confront poor payers, who are often the cause of cash flow problems, and you have a recipe for disaster. The reality is that without a positive cash flow and having money to meet expenses, no business can reach its full potential."
Because of the importance of this financial skill, cash flow was selected as a topic for the series of BizVideos on Standard Bank's BizConnect website. The BizVideos were designed to provide practical advice to small business owners on how to manage a business effectively. The videos can be accessed by logging on to www.standardbank.co.za/bizconnect from March to May 2014.
Cash gap
"Essentially, cash flow is simply about analysing money coming into and going out of a business, and managing the cash gap that can occur when these are mismatched. Understanding exactly what a cash gap is, is essential if you want to avoid it," says Govender.
A cash gap often occurs when stock is bought and payment is required in 30 to 60 days. You still need to mark up the stock and put it on your shelves before you can sell it. The problem arises when it takes longer to sell the item than anticipated. The supplier must be paid, but in many instances the customer still has 30 days to pay you.
Managing your way around these problems means going back to basics and:
- Relook your business plan and business budgets and identify where cash flow problems are occurring so that the situation can be reversed. Most often, this means reducing expenses.
- Concentrate on what is essential for the business to grow and what can be dispensed with.
- Assess inventory and remove items that are not good sellers.
- Stock up on the items that sell quickest.
Using the money you save to reduce debt. Maximise the benefit by:
- Concentrating on paying off things that have the highest interest rates.
- Paying cash when you can and reducing the number of credit lines you have.
- If things are really tough, look at down-sizing the business. Instead of retrenching staff, you could offer them flexi-time packages or part-time employment.
- Asking regular customers when and how many products they will require. Adapt your buying accordingly.
Managing your relationships with suppliers correctly will assist cash flow. Here you could:
- Re-negotiate and extend payment terms. You can then collect your income first and pay your suppliers later.
- See if there is preferential pricing for buying bulk and, if so, consider forming buying groups.
- Look for new suppliers who offer cheaper pricing. Unless there is a benefit from using one central supplier, shop around for several suppliers.
- Request discounts and extra discounts for early payments.
Examining how you are getting money into the business. Take a hard look at:
- Operating on a COD or pre-payment basis. This will immediately decrease your debtors list.
- Thoroughly vet companies or people applying for credit before you extend credit to them. Extending credit only for orders that exceed a minimum order size.
- Asking for deposits. Changing payment terms from 30 days to 14 or even seven.
- If you provide a service, asking for progress payments if work is going to take place over an extended period of time.
- Penalising slow payers by charging interest.
- Refusing to supply customers who consistently wait several months before paying you.
"If after these reviews you still need a cash injection, you could consider applying for a bank loan," says Govender. "Your chances will improve if your company has a good credit record, if there are good financial records available, and if the cash flow problem is temporary.
"If a banker sees that you understand your business thoroughly, are in control of finances and have a plan for moving forward, the chances of successfully getting financial assistance are far greater than they would be otherwise," concludes Govender.
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