Cash is King

Cash is King

Revenue is vanity, profit is sanity, cash is reality

Starting a new venture is exciting for any entrepreneur. Although statistics vary, on average about 50% of start-up businesses in South Africa fail within 24 months and one of the main reasons for this is poor cash flow management. Even start ups that have had unique ideas and were filled with promise have failed because they failed to manage their cash. It is therefore critical to equip yourself as a business owner with the skill to manage this risk and give your business a fighting chance as cash is the life-blood of any business.

Know The Difference Between Cash Flow Versus Profit

Without basic financial knowledge, an entrepreneur might not be able to distinguish profit from cash in the bank. Cash flow is the difference between the amount of cash a company receives and pays, whereas profitability is the difference between revenues and expenses. 

Lets say you have sales of R100 in a month, from that you have to pay your supplier R50 for purchases and you have office overheads like rent, salaries and stationery of R30. Your profit for the month will then be R20. Lets then say you got an interest free loan that needs to be repaid and you are paying back R30 a month. This is when you might find yourself running into trouble because it means that after paying your operational costs you do not have enough cash to service your loan. You are R10 short on cash and if you had anticipated this, you would have seen it coming.

Forecast Your Cash Flows

Cash flow forecasting is simply the planning of cash will come into the business in order to ensure that outgoing cash can be managed. An accurate cash flow projection will alert you of any problems before they occur. Planning your cash flow is always an educated guess based on your previous financial statements and adjusting for any anticipated changes. It is always better to be conservative in your planning so that you are not caught by surprise. Even the most practiced of businesses find their forecasts change on a regular basis, thus there is a need for constant reviewing and monitoring.

The first step is to compile information of what cash you expect to collect from customers. Depending on the size of your business, this information could be in your hands or in the hands of your sales represantitives, your collections department or finance department. Factor in the potential slow or non payers, again estimated from past trends. 

Once you know what cash will be flowing in, you then gather data of what outlays are anticipated. Your outlays would typically include rent, salaries, loan repayments, supplier payments, payments to revenue authority, marketing and any other expenses unique to your business. If you are planning any capital projects, factor the cash outlays at each stage of your project.

Manage Your Cash Collection From Your Customers

If your sales are not COD (Cash on Delivery) then you need to ensure that you manage your collections of cash from customers. Before you do business with a customer, it is wise to have an application process where you do credit checks on the potential customer. To encourage early payment, you could offer your customer early settlement discounts if they settle their balances within a certain period from when a sale is made. Establish a routine of issuing invoices promptly, sending statements regularly as well as following up on payments. Flag any slow payers and maybe ask them to pay a deposit when an order is made. If the slow payers continue to delay with paying their accounts, you might need to withdraw their credit facility and only offer them COD terms. Make sure your payment terms are clear to customers and if need be, remind them if they are not sticking to the terms. Do not be uncomfortable to talk about money otherwise your business will suffer.

Manage Cash Shortfalls

It often happens that you will have a cash shortfall for a variety of reasons. This is not an indication of failure; it is perfectly normal for any business. Be aware that as your business grows, you will require more cash to keep it running and sometimes the inflow of cash will follow only after the outflow. If you are forecasting your cash flows, you will know before you run into trouble and you can then manage this. 

Approach your bank well before time and be frugal with your spending until the storm is over. If your bank won’t provide you with a facility, approach your suppliers for extended credit terms. If you have a good relationship with your suppliers, they are usually willing to negotiate terms. Delay payments for as long as possible but not at the risk of your relationship with your suppliers or service providers. Also consider shrinking your cash flows, for example, you could barter with your customers, delay any capital upgrades or repair equipment instead of purchasing new capital items. If you have any slow moving or obsolete inventory, you could get rid of it at discounted prices so that you can inject some cash into the business. You call also accelerate payments from customers and your first stop would be your long outstanding customers.

As long as your cash flow stays positive, your business can survive the rough patches.