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Business is about making money. Central to this is managing the money coming into the business and the money flowing out. Manage this cash flow effectively and you have a prospering business. Get it wrong and you could find your company mired in debt.
Managing the flow
This fundamental principle of effective business management is addressed in the latest episode of the Business Coach, the Standard Bank-sponsored SABC3 series that examines the challenges facing small business owners and provides them with guidance for avoiding pitfalls when establishing or growing a small business.
“One of the biggest challenges facing SMEs is cash flow,” says Clive Pintusewitz, head of Small Enterprise and Enterprise Development at Standard Bank. “No matter how much you know about what your customers want, the art of managing money and ensuring that cash is available to purchase stock and pay business expenses and salaries is essential to success. The quicker that this art is mastered, the quicker the business will prosper and grow,” he says.
The cash-in, cash-out balance
“The challenge of achieving a balance between cash-in and cash-out can be especially difficult to manage if stock needs to be purchased and held before it can be sold. A good example of this is the clothing industry, where clothing is purchased one season ahead of actual sales activity taking place,” explains Pintusewitz.
Cash flow can be optimised by following a defined plan, thus avoiding the possibility of having sleepless nights over your business’s debts. Pintusewitz says things to think about and put in place include:
- Making sure that the product or service you offer is based on what customers want, rather than what you like. Effective marketing and business development demands that stock is sold as quickly as possible so that cash is injected into the business.
Making selections based on your personal preferences could result in items staying on the shelves longer than they should. This represents an investment that is not working for you or the business. Ultimately, slow sales could mean cash flow problems.
- Ensuring that employees are trained about the benefits and selling points of products. If customers are well informed about your products, interest can be turned into sales and a positive cash flow.
If these two key business components are in place, attention can then be paid to steps that optimise cash flow.
Steps to positive cash flow
“The aim is to ensure that more money is coming in than is flowing out, so that a positive cash flow balance is achieved. Getting to this ideal state is possible if the correct steps are taken,” says Pintusewitz. These should encompass:
- Working to a realistic business budget. This will help keep cash flow on track and ensure that spending is contained within planned limits.
- Constantly reviewing your costs. See if you can find ways of reducing them. This could include making early payments to suppliers who offer a discount for payments made in less than 30 days. Where you can, always negotiate discounts with suppliers.
- Holding on to your cash for as long as possible by making sure that you have just enough stock for your purposes. The larger the inventory you hold, the longer it takes to sell, and the longer you have money sitting on a shelf.
- Paying carefully. Choose which bills to pay in what order. Don’t just focus on the smaller invoices. Pay employees first then pay crucial suppliers.Regularly review when you expect to receive money and pay it out.
- Keeping track of when your customers pay you and when they fall behind so that you can take necessary action to recover the money.
- Considering discounts for early payment.
- Asking for deposits and then ordering the goods required. You can put the money to good use while you fill the order.
- Examining your supplier and customer credit terms. It simply doesn’t make sense to pay suppliers in 30 days and then offer customers 90 days credit.
- Sending invoices as soon as the job is complete. Don't send out invoices at the end of the month.
- Consolidating your loans. Review the rate and terms of each loan and then, if you can, consolidate them into a lower-interest account.
- Comparing leasing and financing options. You may also be able to save on maintenance costs if you lease rather than buy equipment.
Cash flow takes maintenance
“It is crucial that as a business owner you continually maintain control of finances and cash flow. Review key financials at least twice a week. Continually review money going out and money coming in. It’s the best thing you can do for your business,” says Pintusewitz.