Ask the owner of any of South Africa’s 2,6 million small and medium-sized businesses (SMEs) what their main challenges are, and cash flow management is sure to top the list. Yet the unique challenges that SA’s small enterprises face also makes them some of the most resilient in the world.
Regular disruptions caused by loadshedding or strikes force owners to think on their feet every day, adapting their strategies to survive. Such economic volatility also makes managing cash flow extremely difficult
Cash flow is important in managing risk because it’s the financial backbone of any enterprise. When flowing smoothly, it steers the business through choppy economic waters and also allows it to seize growth opportunities as and when they arise.
Successful businesses excel at forecasting what will put cash flow at risk. They can identify these risk factors before they occur and use smart strategies to make sure they land in that safety net
In terms of improving your cashflow, consider the following:
The golden rule for cash flow is to keep your funds for as long as possible. Use some strategic habits to help you conserve your cash so that you will have cash for when your business needs it. There are four elements to remember when thinking about cashflow:
1. Create a cashflow plan for your business and revisit it often. Make sure you are always aware of the incomes and expenses coming in and out of your business so that you can plan better and foresee possible areas of concern early on. This can be in the form of budgets and forecasts that your accountant can prepare for your business.
2. Negotiate with your Suppliers
A large component of effective cashflow management involves managing expenses. The rule of thumb to achieve positive cashflow is to lower expenses, or to stagger the payment of expenses to avoid a large outflow of cash at one time. Negotiating payment terms with suppliers can help in this regard.
Your suppliers may be inclined to offer you a discount on regular orders, or it may be possible to organise a discount on bulk orders placed by a group of SMEs that share the same supplier. Another option could be to negotiate 30-day payment terms at no extra cost, or split payments. This will ensure that expense payouts are more spread out and that the business has time to realise revenue.
3. Incentivise early payments
One of the biggest hurdles that small businesses face is late payments.
As a way of remedying this, small businesses can offer an incentive for early payment in the form of an immediate discount or a discount on the next purchase. Conversely, you could enforce a penalty fee for late payment. Both these strategies can be effective at ensuring that you receive revenue timeously and that your business does not suffer the knock-on effects of a late payment.
4. Build a safety net reserve fund
Having an emergency fund is just as important for small businesses as it is for individuals. Commit to allocating a monthly amount to an emergency fund that will tide you over should the business run into cashflow problems.
Ideally, your business’s emergency fund should be able to cover a three months’ worth of expenses such as staff wages, operational costs, utilities and other essentials. A reserve fund of this nature can carry the business over when profitability is low, costly equipment breaks down or during other business disruptions. And the beneficial implications of a backup fund for keeping your credit record intact during tough times is invaluable
5. Book a free Consultation with us and start taking control of your business finances, plan better for growth and unexpected circumstances.
Dispersive Consulting is an accounting, tax and advisory firm whose mission is to help business owners operate profitable businesses. Sound financial management and a good understanding of business finance empower business owners to make smarter, more informed decisions.
Excerpts taken from Business Partners Ltd.
Comments